Asia growth reflects and exacerbates imbalances

John Foley

Asia is exporting again. That may not be entirely good news.

The financial crisis bought the world a temporary reprieve from Asia’s destabilising trade surpluses. Exports fell as Western demand and trade financing dried up. Even after the spring, when trade in Asia started to turn positive from one month to the next, surpluses remained relatively low as imports of commodities rose.

But with manufacturers largely restocked and inventories topped up, Asian trade surpluses may become an issue again. Korea’s exports grew in September by a steady 4.4 percent on a quarterly basis, compared with double-digit falls at the end of 2008. Hong Kong’s rose 5.9 percent in September month on month, and China’s 11.8 percent.

The problem is that exporting nations are still hooked on their trade surpluses. Consumption made up less of Asian economies’ growth in the first half of 2009 than it did in 2007, according to a Citigroup analysis. China has mimicked private domestic demand, but only through heavy government spending. In achieving nine perent growth in the third quarter, the country showed it can pile on extra investment to clock up rapid gains without a significant rebalancing of its economy. But the uncomfortable reality is that China remains among the world’s most consumption-lite economies. Official data indicates a savings rate of over 50 percent of GDP, according to a Goldman Sachs analysis.

If China increases its GDP at just eight percent a year until 2014, its output would reach $7.5trn. And if the gross savings rate doesn't fall, that would create a $3.5trn wall of money equivalent to five percent of global GDP, which would have to be absorbed by the rest of the world.

This may be a far-fetched scenario. Massive levels of short-term global liquidity may be the primary driver of the Asian export recovery; a flagging US consumer may prevent Asian exports racing away. But whatever the causes, imbalances are poised to increase again – and that is an unsettling prospect.

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