A Delicate Balance: Asia's Opportunities and Challenges

by Pravin Advani, J.P. Morgan, 05 August 2012

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Risk Management

tags:
Asia GDP growth economic restructuring

Economies in Asia are recovering from the global financial crisis with greater ease than their counterparts in Europe and the United States. Opportunities are still abundant across the region, but significant challenges remain.

A glance at global trade figures since 2008 shows how the world trade pendulum has swung decisively towards Asia. The region endured a shallower dip in trade in 2008 and 2009 and enjoyed much stronger growth in 2010 and 2011 compared to the Euro zone and the United States. Asia has already surpassed the trade peak it reached in 2008, while activity in the Euro zone has stalled.

There is a combination of factors that could have contributed to this.

First, South-South trade flows between Latin America, Africa, China and India have been flourishing, spurred largely by rising demand in China and India for raw materials and by investment flows into Latin America and Africa.

Second, there has been a growing number of free trade agreements within the region, which will continue to drive intra-Asia trade. Third, regional players have been looking beyond traditional markets and making successful inroads into new and non-conventional markets.

For example, a report by export advisory group Beijing Axis notes that China has doubled its market share in centrifuges and filtering and purifying machinery — a US$45 billion global export market – from 3.5% to 7.1% between 2007 and 2010. They did not achieve this by taking on established producers in the developed world. Instead, they expanded into Brazilian, Russian and Indian markets.

The Chinese way

When financial crisis struck Asia in the late 1990s, the strength of China’s economy lifted the region from its slump. In the same way, China has helped cushion Asia from the full brunt of the 2008/9 downturn.

A World Bank report puts China’s contribution to world GDP growth at 14.5% in 2009, up from 4.6% in 2003, making it the largest contributor to world economic growth today.

To sustain this level of growth, Chinese manufacturers must move up the value chain. As one economy moves up the value chain, it is common to see another country or region step in to fill the gap.

Higher wages in China are creating opportunities for lower cost producers across Asia, especially in the garment and textile industries. Cambodia enjoyed an increase in garment exports of 35% in 2011, while Sri Lanka is fast becoming an apparel hub, with estimated exports valued at about US$5 billion by 2015.

Research firm Beijing Axis reports that the competitiveness of simple labour and raw material-intensive China-made products has been eroded by a gradually appreciating Chinese currency, government-imposed export duties and quotas, more stringent environmental regulations, and a reduction in the subsidies that have provided access to cheap land and electricity.

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