Asia’s Exports Recover, but Can They Still Drive Growth?

November 26, 2013, 12:07 AM

Asia’s Exports Recover, but Can They Still Drive Growth?

NATASHA BRERETON-FUKUI

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A string of recent export data shows Asia is finally benefiting from a pickup in demand from the U.S. and Europe. But it’s unclear whether the region can rely on exports to power growth as it has in the past. Exports from East Asia recovered quickly in the immediate aftermath of the global financial crisis, expanding 30.0% in 2010 and 15.6% in 2011. But that growth slowed to just 2.3% last year.Recently, there has been some hope the worst is over.

Japan and Singapore last week posted solid export figures, buoyed by growing U.S. demand. That follows a broader recovery in Asian manufacturing activity since October.

J.P. Morgan Chase believes rising demand in the developed world augurs well for Asia. The bank points out that activity in the electronics sector, which accounts for more than one-third of Asia’s manufacturing output, is looking healthy. Meanwhile, the latest export numbers show the recovery broadening to include non-telecommunication technology equipment, as well as smartphones.

Capital Economics economist Gareth Leather said Asia’s most export-oriented economies – Hong Kong, Singapore, South Korea and Taiwan – should perform better as exports pick up over the next few years.

But pessimists say U.S. demand is unlikely to drive Asian growth as much as it used to. For one, Asia’s reliance on the U.S. has declined as trade has grown within the region, especially with China.

In 2012, 13.6% of East Asian exports were destined for the U.S., down from 23.8% in 2000, according to data from the Asian Development Bank. Over the same period, exports to China rose to 22.7% of East Asia’s total exports, from 9.7%.

Many exports to China ultimately are sold to Western consumers, adding an element of uncertainty about the role of U.S. demand.

Senior Chinese officials have indicated that the government could lower next year’s growth target to 7.0% from 7.5% this year. That could be a significant drag on Asia’s export engine, said Changyong Rhee, chief economist at the Asian Development Bank.

“That is why we emphasize that the new growth engine in Asia has to be found in internal demand as well as exports,” he said.

Another concern is that the U.S. recovery appears to be driven less by consumer spending than by investment in new technologies like shale gas. U.S. consumers remain cautious after building up large debts during the housing bubble, and job and pay data remain weak.

“High leverage and muted wage growth may keep the U.S. consumer subdued,” said Edward Lee, head of Southeast Asian economic research at Standard Chartered. “This means even though we expect external demand to pick up in Asia, we are not looking for particularly strong growth – just better growth.”

Some observers believe the uncertain picture could spell trouble for some Asian economies.

Many countries, especially China, relied on large fiscal and monetary stimulus after the U.S. fell into recession in 2007, but Beijing is facing a debt buildup and is unlikely to lend such support to its economy this time around. Other countries, notably India and Indonesia, are facing high inflation that constrains monetary policy.

That could be a problem if U.S. growth hits a speed bump.

Last week, the Organization for Economic Cooperation and Development cut its growth forecast for advanced economies, warning that uncertainty about U.S. fiscal and central bank policies poses a risk to global activity.

Chetan Ahya, chief Asia economist at Morgan Stanley, said Asian governments will have to pursue investor-friendly reforms to boost local demand.

Continuing to use fiscal and monetary policy to drive domestic consumption will only make economies less productive and heighten the risks of imbalances building up, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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