Posts Tagged ‘Asia’

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Re-shoring. If the last decade or so has been characterised by off-shoring, then maybe we are set to enter a new era in which manufacturing returns to home markets, or, failing that, to countries much closer to home. Re-shoring: if it proves to be real, it may provide real, underlying strength to economic recovery. If it proves to be real, then real hope can be added to economic commentary; hope that this time recovery can last. And now we have evidence that it may indeed be happening, right now.

Sometimes predictions can become descriptions. You can forecast what the weather is going to be like. It is much easier and more credible, although perhaps less interesting, to describe what the weather is like. But Boston Consulting has moved from forecaster to describer in one very crucial area. A couple of years ago it made headlines for forecasting a new trend in manufacturing, as companies opt to make their products nearer to their home markets. Now it reckons it has evidence that this is actually happening.

Being one of the world’s largest consultancies, Boston Consulting’s surveys tend to be pretty meaningful. It asked executives at US companies with sales greater than $1 billion about their manufacturing plans. A year ago, 37 per cent said they “are planning to bring back production to the US from China or are actively considering it.” In its latest survey, the results of which were published this week, that ratio rose to 54 per cent.

So why, oh why? 43 per cent of respondents cited labour costs; 35 per cent proximity to customers; and 34 per cent product gave quality as their reason for considering re-shoring.

Michael Zinser, from the consultancy, said: “Companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture…When you look at the total cost of production for many goods, the US appears increasingly attractive.”

The Boston Consulting survey probably provides the most compelling evidence to date that re-shoring is occurring, but it is far from being the only evidence.

Back in July a survey from YouGov on behalf of Business Birmingham revealed that one in three companies that currently use overseas suppliers are planning to source more products in the UK. John Lewis recently said that it plans to increase the volume of made in the UK products by 15 per cent between now and 2015.

This development is good news in more ways than one; it may even be very good news in quite a profound way, but more of that in a moment.

But what about China? This is surely not such an encouraging development for the economy behind the Great Wall. Well maybe it isn’t, but maybe it actually is. What China needs is for wages to rise, and for it to see more growth on the back of rising demand. Its economy is simply out of balance. No one is predicting the end of Chinese manufacturing, merely that it may lose some of its dominance. If this loss occurs because wages in China have risen, creating more demand, this is good news for China, its suppliers and the companies that sell to its consumers. Okay, changes are never smooth. There will be short-term headaches caused by re-shoring, but the overall impact will be positive rather than negative.

But there is another perhaps more important implication.

Over the last few decades we have seen growing inequality, and company profits taking up a higher proportion of GDP, while wages take up a lower proportion. Some think this is good thing, and accuse those who criticise of being guilty of the politics of envy. They miss the point. You may or may not think inequality is morally justified, but it is clear that from an economic point of view it is inefficient. For an economy to grow it needs demand to rise, and in the long run this can only occur if the fruits of growth trickle down into wage packets. It is perhaps no coincidence that the golden age of economic growth occurred in the 25 years after the end of World War II, an era which saw much more equality than we see today.

It is possible that re-shoring is symptomatic of changes in the balance of power across the markets. For years we have seen what the IMF calls the globalisation of labour: the reward to capital rose, the reward to labour fell. The underlying cause of this may have been the one-off effect of millions of Chinese workers joining the globalised economy. As this one-off effect begins to ebb, we may see the globalisation of labour work in reverse.

See also: Wages set to rise – in emerging markets

© Investment & Business News 2013

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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It happened in 1997, and some think it is happening again. Back in 1994 the US Federal Reserve upped interest rates, and so begun a cycle of tightening monetary policy. Money flowed from East to West, and in 1997 crisis was the watch word. The so called tiger economies of South East Asia in particular saw their economies look distinctly like a certain fruit – a pear. It was an important episode. Some say that the Asian crisis of 1997 sparked off a chain of events that led to the 2008 finance crisis. And now it seems to be happening all over again. Or is it?

Many economists say that the tragedy of the Asian crisis was that it was not the fault of the countries that were the victims. Cheap interest rates in the US meant money flowed from the US and Europe into South East Asia. Not all governments in the region wanted it. But – or so Nobel Laureate Joseph Stiglitz, who was chief economist at the World Bank at the time alleges – the IMF urged governments to welcome the influx of money. It is just that when money flows fast, not all of it is used wisely. Bubbles are born. Then in 1994 things began to change. Slowly the Fed increased rates. By 1997, the interest rates in the US were attractive to investors, and money flowed back. Bad Asian businesses were exposed. Good businesses were caught out too. The IMF came riding in to the rescue, but not all agreed with how it reacted. Critics say the IMF was more concerned about finding ways to ensure the West got its money back than helping the countries of South East Asia cope with the crisis.

And in so doing seeds were sown. Many countries in South East said never again, and vowed to ensure they were never again reliant on overseas capital. China watched events with alarm, and its policy of keeping a cheap yuan, and pushing for growth off a trade surplus was born. Many economists say this policy helped to contribute to global imbalances, which may have been an underlying cause of the 2008 crisis.

But by trying so hard to save the West, the IMF and –what Stligtz calls the Washington Consensus – western banks got off lightly, It happened again in 1998 with the Russian crisis and the collapse of LTCM, for which Fed Chairman Alan Greenspan managed to orchestrate a rescue which avoided a western banking crisis. But the rescue meant moral hazard because western banks did not learn their lesson. They repeated their errors until they became too big for even the Fed to sort them out in 2008.

Now let’s come up to date. We appear to be entering a new period of rising interest rates. The Fed and Bank of England have tried to persuade us that rates will not rise for some time, but the markets are not buying it. Every piece of good news, every

piece of okay news on jobs in the UK and the US, makes the markets more certain that rates will be rising sooner rather than later. On the back of this, yields on US government bonds have hit two year highs. It is not so much that money is flowing from Asia back into the US, but that the markets fear this will happen. And the fear is having an effect. The Indian Rupee fell to all-time low against the dollar yesterday (19 August). But emerging market currencies saw sharp falls across the board.

So far this year has been disastrous for the South African Rand, the Brazilian Real, and now the Indian Rupee. Last week data revealed that Russia is in recession. Yesterday data emerged indicating that Thailand is in recession. The Indonesian stock market saw sharp falls as markets took fright over the size of its current account deficit. Indonesian government debt is rising too. Yet there are reasons to think that some of these countries are being wrongly punished by the markets, and the ultimate loser will be the markets themselves.

This time around many of the larger countries of South East Asia are far less reliant on overseas money. Savings ratios are high.

In Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example. As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

Indonesian domestic credit to the private sector is just 33 per cent, compared to 203 per cent in the US. The ratio is just 33 per cent in the Philippines too. It is even lower in Mexico, which may, by the way, benefit from re-shoring as manufacturers move closer to the US market.

As far as emerging markets are concerned, the markets are in panic mode. In such times they are lousy at picking the wheat from the chaff. When they become more rational, certain emerging market countries will see equities boom.

© Investment & Business News 2013

In 2004, the US Federal reserve upped interest rates. Three years later crisis rocked South East Asia. Some fear a repeat of this, but Matthew Dobbs, fund manager of Asia ex Japan equities at Schroders, is cynical about such cynicism when it comes to the so-called ASEAN countries, and especially when it comes to Thailand.

He said: “Whereas 1997 was a currency crisis, caused by an unsustainable accumulation of US-denominated debt, the country’s foreign-denominated debt, as well as those of its neighbours, is at a far more stable level.

“Thailand’s domestic economic engine is also being driven by policies aimed at growing consumer spending power and accommodating business growth – such as a near-40 per cent increase in the minimum wage that came into effect in April this year as well as a corporate tax rate cut in two phases, from 30 per cent to 20 per cent by the end of 2013. The ongoing urbanisation process in the country continues to spur growth as GDP came in at a salubrious 6.4 per cent in 2012 and is projected to grow at 5.3 per cent this year. Thailand’s latest private consumption growth figures witnessed a healthy increase of over 12 per cent year-on-year in the fourth quarter of 2012.

“Meanwhile, Thailand’s public debt-to-GDP ratio is a respectable 44 per cent, with most debt domestic and baht-denominated. It’s this fiscal room that has allowed the government to take on an ambitious multi-year infrastructure spending plan which seeks to invest up to THB2tn (US$68bn) over the next seven years. This push in spending will mainly go towards transport, with high-speed rail projects, an extension of Bangkok’s MRT and dual tracking of more than 2,000km of existing rail lines all forming part of the government’s vision.”

“On the whole, the region’s finances have seen a marked improvement over the past decade. Sturdier current account balances, along with robust FX reserves means governments have ample room to absorb any volatility the region may experience, while current account balances are significantly stronger than they were in the years before the crisis.

“Furthermore, there has been upside for countries and their credit ratings. Indonesia, which saw Moody’s and Fitch raise their credit rating for the country to investment-grade at the beginning of 2012, was joined by the Philippines as the fellow archipelago was also upgraded by both Fitch and S&P in the past two months to investment-grade status. In addition, Thailand has seen its currency perform the best among the 11 most active Asian currencies so far this year.”

© Investment & Business News 2013

It appears that the Chinese economy lurched backwards again in May. The Eurozone remained firmly in recession, or is that depression? So much for things looking up!

You may know that the Purchasing Managers’ Indices follow a formula, with any score over 50 meaning expansion; under 50 indicates contraction. However, with China it is not that simple, and normally a score under 50 suggests growth slowing rather than outright contraction.

This morning the flash composite PMI for China from HSBC/Markit and for the Eurozone from Markit were out.

These are preliminary readings, with the fuller and more accurate PMIs due out at the beginning of June.

The May flash composite PMI for China was 49.6, the first reading under 50 since last October. The May flash composite PMI for the Eurozone was 47.7, the highest reading in three months but still consistent with recession.

Let’s see what the more accurate and detailed PMIs for both China and the Eurozone say in ten days’, or so, time.

© Investment & Business News 2013

The headline figure was nothing to write home about, but drill down and maybe there is reason for real optimism.

The UK’s balance of trade in goods barely moved in March, with the deficit coming in at £9.1 billion. So far, so indifferent.

As for the UK’s deficit on trade in goods and services, this was marginally better than February scoring £3.1 billion from £3.4 billion the month before. Okay that was an improvement , but actually the deficit for March was pretty close to average over the last year or so.

The deficit has not significantly changed over the last ten years. Now, change the perspective, and look outside Europe. Exports to the US soared 21 per cent in March over the month before.

Exports to the BRICS have been steadily rising for some time. See this chart:

Okay, exports to China are still way below imports from China, but the chart makes it clear that exports have been growing much faster than imports for some time. In fact over the last two years, exports from the UK to China have increased by half as much again. Imports from China to the UK have risen 10 per cent.

© Investment & Business News 2013

“You don’t get it.” “You are trying to apply Western ideas to China, and it doesn’t work.” That is what supporters of all things Chinese say when western economists talk about a bubble in the making in any one area of China.

That may be right, but does that observation not smack you as being a touch racist. Don’t you think that people are much the same everywhere?

Now a Chinese economist (note that Chinese economist) has warned that local government debt across China is “out of control.” Zhang Ke vice-chairman of China’s accounting association, was quoted in the ‘FT’ as saying: “We audited some local government bond issues and found them very dangerous, so we pulled out…A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”

The ‘FT’ paraphrased Mr Ke as saying the potential crisis in the making could be as serious as US subprime.

In the West we tend to assume central government in China is all powerful; that what it says goes. In fact, it finds it very hard to exert much control at all over the regions. As the ‘FT’ piece pointed out, there are 2,800 counties in China.

It is not hard to envisage a debt crisis in the making; indeed Fitch may have anticipated this when it downgraded Chinese debt recently. It is very hard indeed for an economy to grow at the kind of rates seen in China over the last two decades without bubbles growing. Its government may be very clever, but it is not omnipotent, and its ability to stop a bubble is limited.

One more point on the question of Chinese cultural attitudes being different. If anything, China may be more susceptible to the groupthink and group compliance which may lie behind bubbles. Back in the 1950s, psychologist Solomon Ashe showed how it is human nature to comply with the group, even if that means saying something that is obviously not true. Psychologists have re-run the tests worldwide, and have found that the tendency to comply with the group, even when the group is clearly wrong, is even stronger in countries known for their cooperative culture, such as China.

It would be a mistake to over-egg this because the differences shown by the psychological tests were not great. But to say that western-style bubbles are not likely in China is manifestly untrue.

©2013 Investment and Business News.

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