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Friday, December 12, 2008

Asia after the credit squeeze!

Here again, is another lovely article from the McKinsey Quarterly talking about Asia's furture after the financial crisis. This publication is beginning to have a profound effect on my global view, as much as the Economist and the Wall Street Journal have---in fact, more impact on my vision than does the Wall Street Journal.
http://www.mckinseyquarterly.com/Financial_Services/Banking/Asias_future_and_the_financial_crisis_2270

They run us through the issues that happened when the crisis came to town. While I won't discuss, in total detail, the merits for a better Asia--some points on the economic side of it however, bear representing.

For a good while when Lehman and Bear Stearns started to fall apart at the onset of this crisis, Asia was seen as a safe haven for stock and bond investors. They were as stable as Europe, but without all of the financial ties Europe had to American finance. Hence, investors, who were not already entrenched in the US financial system, by-passed Europe and went straight to Asia. This was a fair enough reaction and warranted. The Asian financial market was not as sought after because, I feel, it was severely untested and post 1997-98 Asian financial crisis, financial stability in the region coupled with autocratic sovereign type regimes, was not something an investor looking to invest would go to Asia for--besides, tech stocks and automobile related stocks, were a better and more lucrative venture, in any event.

However, as the McKinsey article notes, the crisis came to Asia in the form of an extreme downturn in exports to their major consumer base in the West. In fact, reports from the World Bank states that China in particular has had a sharp drop in exports in total.
http://www.forbes.com/afxnewslimited/feeds/afx/2008/12/10/afx5801711.html
http://www.ft.com/cms/s/0/4336a27c-babe-11dd-bc6c-0000779fd18c.html

Just to note, analyst's have warned China on export driven growth. They were left totally exposed to international shock. It is up to the government to do something, while not becoming more protectionist as Thailand and Vietnam have done with this year's rice crisis, turning rice exports inward, hoarding on one end and supplying particular regional partners at a higher price, through cutting export quota's and as a result, raising export prices to others.

So, while people were investing in Asian stocks as a safe haven from US and EU sub-prime related investment's, while the sub-prime credit squeeze took tremendous effect, Asian stocks started to lose value because they were moving less product because their production base--very capital intensive cars and small labour intensive gadgets and trinkets, were not a priority for US and EU markets, as much as food based commodities and now, more importantly for the future, construction based investments; ore; concrete and; plumbing fixtures etc...this is even before governments like France and the USofA, decided to go on the path to structural developments and capital investments, to bring itself out of the slump.

Forget about oil. Oil pricing and the mechanisms for which the price on the market is derived, has been out of whack due to derivatives and futures trading, inflating the prices unnecessarily. Oil has a long way to go before correcting itself to it's true market value. First the inflation and now, the crushing deflation. Oil won't be a way to go for at least another 2-3 years. At best. what makes it worse, is that new tech in alternative energy is coming.

In any event, the other issue the article touched on is the Asian financial market. While it is inevitable that they have increased in trade between themselves through ASEAN and APEC--more so with ASEAN. Financial stability has to come and greater financial participation, is inevitable. However, some things must come first and be taken into consideration. For starters, a regional network for stock exchanges must be done through ASEAN and not the WTO or any other Western bourse. This is a crucial mistake, if they sub-contract their regional bourse to that of a foreign entity. An Asian market, has to set asian prices. An even bigger mistake, if they left region wide ratings to one country or to a western firm. They would never have a stable bourse for the region, if it is not inclusive of solely ASEAN countries--Asian centric, with China and Japan and Australia as the gate-keepers.

Second, they have to work on a master fund for the region. The article mentions this. A fund, sort of like the IMF. However, it can't be an old boys club and take pattern from their individual country models that are based on very compact and centralized regulations. Most notably Singapore and the other sovereign entity, China. This would be a crucial mistake for innovation and dynamism in the region and may hurt exports further as well as solidify the base for stagnation in regards to investment.

The old boy's club of rich elites and sovereigns, may make the proliferation of the wrong type of market structure and macroeconomic principles, harder to reverse as there will be a pervasive feeling of de-stabilizing democratic and social forces as a consequence, due to greater economic power, but little freedom to make create and attain greater economic power unless you are dictated to or allowed to by the sovereign directorate. I say this, based upon the models of protest witnessed in Tienanmen Square, the quiet protests in Singapore and the issues in Thailand--there simply is too much money, floating around with no democracy. In fact, democracy in Asia is almost an oxymoron in representing linkages.

Also, another concern for greater financial cooperation, may be that it would be very aversive to foreign direct investment and create a separate buffer for extra regional investment, sort of like how the EU treats member countries national interests, as every national economic decision has to ratified pending EU approval--this is a non-tariff barrier in itself. This works out to regional protectionism, and not what it was meant to be--global integration through economic cooperation. On top of all of that, ruining exports to the west, as we have seen with regional MFN actions in rice exports to the Philippines from Vietnam and at the same time, creating a regional block of super Asian moneyed elites who are hell bent on economic power.

May be a little far fetched. Perhaps they would not get along. But, it is a scenario on the table to be discussed.

Youri
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