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Asia Recovery: Addressing Structural Issues
03 Nov 2009
| Nicholas Kwan, Regional Head of Research, Asia,Global Research, Standard Chartered Bank |
Which Asian markets have been most affected by the global financial downturn and which have fared relatively well?
Almost no one is spared but in general those more integrated with the global financial systems (like Hong Kong, Singapore, Korea) and those heavily dependent on exports to the West (again Hong Kong, Singapore, Taiwan, Korea, and to some extent China) are worst hit. Those economies with strong growth momentum and large domestic market to fall back on, such as India, Indonesia, China and Vietnam (all four maintained positive y/y GDP growth throughout the crisis) are doing relatively better.
What economic stimulus packages have been put in place? Does more need to be done?
Both fiscal and monetary tools were aggressively applied to arrest the post-Lehman downturn. China is among those with the largest fiscal stimuli, ranging about 6% of GDP p.a. Policy interest rates were cut at unprecedented speed and scale across Asia, supplemented by emergency liquidity support and capital injection to financial institutions. With most Asian economies reporting better growth in Q2-09, the need for additional stimuli is reducing, but no quick withdrawal of fiscal and monetary support is warranted also. Going forward, governments need to fine-tune their stimulus measures to ensure a more sustainable and balanced rebound of their economies.
To what extent have Hong Kong and China been affected and to what extent are they recovering?
The two were hit at varying scales. China’s real GDP growth eased from 10.1% in Q2-08 to 6.1% in Q1-09 before it rebounded to 7.9% in Q2-09. Hong Kong real GDP growth turned negative in Q4-08 at -2.6% and troughed at -7.8% in Q1-09 before improving to -3.8% in Q2-09. In seasonally adjusted q/q terms, Hong Kong already returned to positive growth in Q2-09, ending its 4-quarter recession.
To what extent has liquidity tightened and is financing available for real estate projects?
Liquidity tightened sharply in the post-Lehman months, largely in terms of US Dollar liquidity as global financial systems came under extreme stress. Fortunately, large Foreign Exchange reserves and healthy current account surpluses allowed Asian central banks to cushion the USD liquidity shock. Local currency liquidity generally faces less of a problem, though a temporary hiccup was experienced due to counterparty risk and trade finance disruptions. Financing of real estate projects, along with most long-term investments, are somewhat dampened by the falling risk appetite of investors and tightening in liquidity. As the economies continue their recovery and monetary policy stays loose, a recovery in long term investment financing is underway.
Are there any particular types of projects for which banks are more likely to lend?
There is a difference between public and private sector banks. The former is more driven by policy lending, which usually focuses on infrastructure, key sectors and SMEs. The latter is more driven by credit and margins, which vary from place to place.
Is China still attracting international investment?
Yes, though at lower levels than before the crisis. International bank lending to China rebounded the most in Q1-09 among the developing economies, while foreign direct investment amounted to USD43bn in H1—09, 17% less than a year ago but still substantial.
To what extent has there been a price adjustment in real estate and in land?
Data on real estate and land prices is highly diverse and incomplete. Hong Kong’s housing price has rebounded by 17% in H1-09 and has almost fully recovered its loss since mid-08. The same is largely correct for housing prices in major Chinese cities like Beijing, Shanghai, but some cities such as Shenzhen have suffered a sharper correction and have yet to have their prices fully recovered.
To what extent is China driven by domestic demand?
Basically all growth in H1-09, averaging 7% y/y, was driven by domestic demand, since net export contribution to growth is negative.
How transparent is the market in China? Do you think there needs to be further regulation?
China is still in its transition from a planned to market economy and much remains to be improved in terms of market regulation, including disclosure and transparency. But we also need to be aware that substantial progress has already been made and changes are continuing. It takes decades, not just years, to build or rebuild a system and an economy.
Do you think emerging markets will continue to be attractive for international investors? Do you think international investors will revert back to the mature markets for opportunistic investments?
Many emerging markets will stand out even more in this crisis and appeal more to international investors, simply because they perform better and handle the crisis well. The mature markets will take time to recover and need to go through lots of changes and reform. This may offer opportunities but perhaps not in the scale of the pre-crisis period for some time to come.
To what extent do you think there will be a growth in Islamic Finance?
Many Islamic economies prevail relatively well in the crisis, e.g. the GCC and Indonesia, this will raise their attractiveness to international investors as well as support development of their own financial systems, i.e. Islamic Finance.
Do you think there will be increasing interest in REITS?
Yes. Real estate as an investment class will have lots of room to grow, especially in the emerging markets. Securitisation will also have a future in global and regional finance, though recent excesses in the mature markets will need to be addressed before a full scale rebound materialises.
What do you think are the key lessons that have been learned?
There are many aspects, a few key points are: modern finance needs to pay extra care to monitor and manage risk and leverage, we need a better global regulatory regime to manage global finance as globalisation deepens, we also need to address the problem of global imbalances in savings and consumption, especially between the US and Asia.
What do you think are the main challenges and opportunities?
The short-term challenge remains to foster the nascent recovery and prevent any premature exit/tightening. The long-term challenge is to address the structural issues mentioned in the previous question. Opportunities rise from new growth areas and new systems that will emerge from the above challenges, e.g. growing savings in the West and rising demand in the East as the world reduces its imbalances.
What do you think is the outlook for the next 12 months for Hong Kong and China?
We’re confident the current recovery will continue in the next 12 months, given a low base to build, strong fundamentals and responsive policies. The challenge is how sustainable the recovery will be, not in 12-month terms but in 2-3 years. A more balanced recovery between the private and public sectors is needed, growth in output needs to be accompanied by improvement in efficiency and profitability to be sustainable, liquidity needs to spread from the current short-term asset markets to longer term productive investments, the export sector also needs to transform itself, either in terms of better competitiveness or in terms of more diversified markets. All these require concerted efforts but also offer many opportunities to businesses.
Source: Cityscape Intelligence