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DSGAsia Post Crisis Financial Regulation and Macro Stability in Asia Simon Ogus Singapore Economic Policy Forum 22nd October, 2010 [email protected]; www.dsgasia.com DSGAsia Independent Asian Economic & Political Analysis Deleveraging in the West is a multi-year process and there is scant evidence as yet of credit multipliers re-starting. A square-root “recovery” seems likely Global Nominal Money and Credit Growth 14% 14% The Square-Root “Recovery” % YoY 3MMA 12% 10% 12% Private Domestic Non-Financial Credit 10% 8% 8% 6% 6% 4% 4% Broad Money 2% 2% 0% 0% Global includes US, Euroland, UK & Japan -2% -2% 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 DSGAsia Independent Asian Economic & Political Analysis 2 Rebalancing has been only partial. Current account dispersion remains historically wide in the context of a deleveraging (?) world Current Account Balances as a % of GDP Global Cross Border Capital Requirement as a % of Global GDP 6% 12% 6% 12% USA Germany China % GDP 10% 5% 5% Global Capital Flow Requirement * 4% 8% 8% 6% 6% 4% 4% 3% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% 2% 2% 1% 10% 4% NonIntervention Capital 3% Eurozone ex Germany Japan Asia ex Japan & China 1% Intervention Capital = Change in Global FX Reserves Source Data: IMF 0% -8% 0% 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F -8% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F * Sum of the absolute size of global current account balances DSGAsia Independent Asian Economic & Political Analysis 3 11F This is partly thanks to unreconstructed mercantilism. The dollar is cheap against the majors and in line with Asia, but the real divergences remain within continents Real Unit Labour Cost-Based Trade-Weighted Exchange Rates Real Unit Labour Cost-Based Trade-Weighted Exchange Rates 180 180 180 January 1990 = 100 180 January 1990 = 100 160 160 160 Japan 160 Non-Germany Euro Area Japan 140 140 140 140 120 120 120 120 100 100 100 80 80 80 60 60 Euro Area 100 USA 80 Germany China 60 USA, Japan and Euroland IMF Calculations; Asia* and China DSGAsia Calculations Asia ex China ex Japan 60 Korea * ULC-based where available, WPI-based otherwise 40 40 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 DSGAsia Independent Asian Economic & Political Analysis 40 40 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 4 Japan is the champion government debtor but a unique ownership pattern suggests that Europe is the likelier catalyst for bond market mayhem 100% 90% 80% Government Debt as a Percentage of GDP Asia ex-Japan* USA** UK Asia ex-Japan, China & India* Euroland Japan (RHS) 240% 220% Sectoral Holdings of Central Government Debt (June 2010) Sectoral Holdings of Central Governement Debt (Jun 2010) 200% Central Bank 7.9% 180% 70% 160% 60% 140% 50% General Government 11.3% Postal Savings 20.8% 100% 80% 30% 60% 20% 0% (of which Foreign holdings 6.1%) 120% 40% 10% Private Sector 39.3% 40% * Excluding central bank paper ** USA 2008 84% of GDP if State and GSE debt is 20% Forecasts from the IMF Public Financial Institutions 0.3% Public Life Insurance 9.8% Public Pension Funds and CMTs 10.6% Source: Japanese Government Flow of Funds Data 0% A 2009 Rogoff-Reinhart study notes that if public debt exceeds 90%, median growth rates fall by 1% and average growth rates by more DSGAsia Independent Asian Economic & Political Analysis 5 Where was the decoupling? An early 1990s earnings trajectory seems likely though this may not preclude market re-ratings at times of global calm Asia ex Japan Exports & EPS Growth and the US ISM Manufacturing PMI Asia Exports and OECD Industrial Production 40% OECD Industrial Production (RHS) 30% 12% 50% Asia Ex-Japan Exports (LHS) 9% Exports USD %YoY, 3MMA, EPS market cap/MSCI weighted %YoY 40% 65 Index 3MMA Asia ex-Japan Exports (LHS) 60 6% 30% 20% 0% 10% 20% 50 -3% 0% -10% 55 3% -6% Asia Ex-Japan Exports Volumes (LHS) 10% 45 0% -9% 40 -10% -12% -20% -15% USD %YoY, 3MMA -20% %YoY, 3MMA -30% US ISM Manufacturing PMI (RHS) 35 Asia ex-Japan EPS Growth (LHS) -18% -30% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 DSGAsia Independent Asian Economic & Political Analysis 30 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F 6 Year-on-year export comparisons are easy but volume levels will tell us whether sustainable final demand is really returning Export Volumes Export Volumes 300 180 270 160 240 240 140 140 210 210 120 120 180 180 100 100 150 150 80 80 120 120 60 60 90 90 40 40 60 20 300 Japan Taiwan 270 60 Korea China 05 180 Singapore (Non-Oil Domestic) Thailand 160 Index 2004 = 100, Index 2004=100, 3MMA 04 Hong Kong (Domestic) Malaysia 06 07 08 09 10 DSGAsia Independent Asian Economic & Political Analysis 20 04 05 06 07 08 09 10 7 Real interest rates have been structurally declining and in China’s case especially, are well below the real expected return on capital China Real Interest Rates Asia ex-Japan, China & India Real Interest Rates 12% 12% 12% 12% % 9% % 10% 10% 8% 8% Corporate Rate 6% 9% Corporate Rate Mortgage Rate 6% 6% 3% 3% 0% 0% 6% -3% Mortgage Rate 4% 4% 2% 2% 0% 3-Month Deposit Rate -6% -6% -9% -9% -12% -12% -15% -15% -2% -18% -18% 0% -2% -3% 3-Month Deposit Rate -21% -4% -4% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 DSGAsia Independent Asian Economic & Political Analysis -21% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 8 10 This all suggests that Asian property can still get a whole lot more bubbly Ratio of House Prices to Household Disposable Income Ratio of House Prices to Household Disposable Income 7 13 7 Australia 6 Japan 5 6 13 India (Mumbai HDFC estimates) Taiwan 11 11 5 China (35 Major Cities) 9 4 Korea 4 UK 3 9 7 7 5 5 3 2 2 USA 1 1 0 0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 DSGAsia Independent Asian Economic & Political Analysis 3 3 Hong Kong (Mass) Singapore (HDB) 1 1 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 9 08 09 NPLs will eventually rise across the region but this should not for the most part hinder the ability of banking systems to lend. Multipliers work out here Loan Deposit Ratios Adjusted for Reserve and Statutory Liquidity Requirements Net Non-Perfoming Loans as a Percentage of Total Bank Capital 270% 270% 1.5 Japan Asia ex-Japan, China & India 240% Asia ex-Japan ASEAN-4 240% 210% 1.5 1.4 1.4 210% Australia 1.3 1.3 1.2 1.2 180% 180% 150% 150% 120% 120% 1.1 90% 90% 60% 60% 30% 30% 0% 0% Korea 1.0 -30% 1.0 Asia ex Japan (GDP Weighted) 0.9 0.9 Asia ex Japan 0.8 (Average) 0.8 China -30% 0.7 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DSGAsia Independent Asian Economic & Political Analysis 2009 1.1 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 10 Conclusions Real interest rates in the developed world are both too low and too high at the same time. Too high to allow deleveraging economies to fully recover, yet too low to encourage capital to exit and/or transfer from weak to strong hands In Asia, real interest rates are unequivocally too low and way below expected rates of return on capital. Healthy financial systems are intermediating credit to generally underleveraged consumers and corporates. Bubbles threaten Interest rate normalisation is being constrained by atavistic exchange rate targeting tendencies and a valid fear of excessive capital inflows. Trade wars and capital controls loom Nevertheless, with external demand likely to remain relatively constrained, such Mercantilist tendencies need to be junked once and for all. Exchange rate manipulation is a hard habit to break for all too many though…. China is more able to achieve the holy trinity than most and thus it can perhaps afford to believe that the RMB is everyone else’s problem. In the words of Spiderman, “with great power comes great responsibility” DSGAsia Independent Asian Economic & Political Analysis 11