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DSGAsia
Time for Asia to take some
Self-Responsibility
Simon Ogus
Rimrock Global Economic Summit
May, 2011
[email protected]; www.dsgasia.com
DSGAsia
Independent Asian Economic & Political Analysis
DSGAsia’s Global Economic Assumptions
 The US economy has received another double sugar shot but we would subsequently expect
momentum to wane again as the steroids work off
 The developed world remains enmeshed in an extended deleveraging cycle. Policy rates will
remain low although this will not preclude periodic long bond sell-offs in response to short-lived
inflation scares and bursts of economic activity
 The bigger structural risks for bondholders remain, for now, credit-related. Post-quake,
Japanese vulnerabilities have increased further but not to tipping point. Rather it is still Europe
where debt restructurings and/or defaults seem all but inevitable. Timing is tougher to gauge
 Developing Asia’s financial systems, by contrast, are in fine fettle and we are already seeing an
upswing in the credit cycle. This is largely a response to negative real rates, in turn a function of
continued exchange rate manipulation. Time to take some self-responsibility….
 In fact, another external shock could be quite helpful for the region since many local central
banks remain unwilling to tighten preemptively, or are politically-constrained from doing so
 In the absence of exogenous accidents, Asian growth and inflation momentum will remain
strong. Local asset markets could continue to perform well but make sure you pay for
protection since across the globe fat tails continue to get fatter
 At times when nothing bad is happening, near-zero rates are a powerful tailwind for risk assets.
Nevertheless, financial systems remain highly unstable while market participants and
businessmen are increasingly subject to the risk of arbitrary political events and interventions
DSGAsia
Independent Asian Economic & Political Analysis
2
The Fed has been the focus but the ECB has turned itself into an even bigger SIV, albeit
in a far more surreptitious manner. China is in a completely different league though
Central Bank Balance Sheets as a Percentage of GDP
Central Bank Balance Growth
160%
70%
160% 35%
%YoY, 3MMA
140%
140%
30%
60%
120%
120%
100%
100% 25%
50%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
Federal Reserve
ECB
Bank of England
Bank of Japan
03
04
05
06
07
08
09
15%
30%
10%
20%
5%
10%
Federal Reserve
-60%
02
40%
China
-60%
01
20%
10
DSGAsia
Independent Asian Economic & Political Analysis
11
ECB
Bank of England
04
05
China (RHS)
Bank of Japan
0%
0%
00
01
02
03
06
07
08
09
11
10
3
Deleveraging will be a multi-year process. Shadow banking contractions dwarf
central bank and on-balance sheet liquidity creation. Asia has no such constraints
Asia ex-Japan Broad Money and Credit Growth
Global Nominal Money and Credit Growth
14%
14%
16%
16%
%YoY, 3MMA*
% YoY
% YoY
12%
12%
10%
10%
8%
8%
14%
14%
Broad Money
12%
12%
10%
10%
Broad Money
6%
6%
4%
4%
2%
2%
Private Domestic NonFinancial Credit
0%
0%
-2%
-2%
Credit
8%
8%
6%
6%
Broad Plus Shadow
Money
Global includes US, Euroland, UK & Japan
-4%
-4%
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
DSGAsia
Independent Asian Economic & Political Analysis
09
10
11
* Simple average of growth rates
4%
02
03
04
05
06
07
08
09
11
10
4
4%
In poorer countries, food inflation is the core and rapidly impacts on
expectations. Especially if there is ample monetary accommodation
Non-Japan Asia Headline and Core Inflation
Asia ex-Japan, China & India Real Interest Rates
12% 14%
12%
%
14%
%YoY
10%
8%
10% 12%
12%
8% 10%
10%
Corporate Rate
6%
8%
4%
4%
6%
2%
2%
4%
4%
0%
0%
2%
2%
-2%
0%
6%
Mortgage Rate
6%
Headline CPI
Core CPI
3-Month Deposit Rate
-2%
8%
0%
GDP weighted CPI except India WPI
-4% -2%
-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
10
11
-2%
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 11
5
Who says that the Asian consumer has a cultural aversion to debt?
Household Debt as a Percentage of Disposable Income
Household Debt as a Percentage of Disposable Income
160%
160% 140%
140%
140%
Malaysia & Thailand (LHS)
India
120%
40%
China
Indonesia, Philippines
35%
30%
100%
120%
120%
25%
80%
100%
100%
20%
60%
15%
80%
80%
40%
60%
60%
USA, UK & Australia
Japan
HK & Singapore
Korea & Taiwan
40%
40%
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
DSGAsia
Independent Asian Economic & Political Analysis
2009
10%
20%
5%
0%
0%
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
6
China and India have been growing above potential and were reluctant to tighten
at first. Of the two, India has done more and has the smaller liquidity overhang
30%
China Real GDP Growth and the Li Keqiang Index
India's Infrastructure Deficit and Inflation
30% 15%
%YoY, 3MMA
25%
25%
LKQ Index, real credit
(including shadow
lending) growth
20%
15%
12%
Wholesale Price
Index (RHS)
Real GDP
10%
10%
20%
15%
10%
10%
5%
5%
0%
0%
8%
5%
6%
4%
0%
Infrastructure
Deficit* (LHS)
2%
-5%
-5%
LKQ Index: Equal weighted growth rates of real bank loans,
railway freight volumes and electricity consumption
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
DSGAsia
Independent Asian Economic & Political Analysis
0%
* Manufacturing less Infrastructure Industries Production.
Infrastructure industries = electricity, coal, oils, steel and cement
%YoY 3MMA
%YoY 3MMA
-5% -10%
-2%
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
7
11
Chinese real lending rates are barely positive, especially for SOEs, By contrast
higher borrowing costs are starting to bite in India
China Interest Rates
India Interest Rates
8 16
8
%
16
%
7
7 14
6
6
5
14
12
12
10
10
8
8
6
6
5
4
4
3
3
2
2
1
3M SHIBOR
1Y Deposit Rate
10Y Government Bond Yield
0
01
02
03
04
PBC 1-Year Lending Rate to Financial Institutions
1Y Lending Rate
1
0
05
06
07
08
09
10
DSGAsia
Independent Asian Economic & Political Analysis
11
4
4
3-Month MIBOR
Base Lending Rate
Repo Rate (Policy)
10Y Government Bond Yield
1Y Deposit Rate
2
2
01
02
03
04
05
06
07
08
09
10
11
8
It is true that private Chinese companies are paying higher rates and issuing
significant paper in HK but the system as a whole is not contrained
Loan Deposit Ratios Adjusted for Reserve and Statutory Liquidity Requirements
Annualized underground lending rate in Wenzhou
70.0%
150%
150%
140%
140%
60.0%
Korea
130%
130%
Australia
50.0%
120%
120%
40.0%
India
110%
110%
30.0%
100%
100%
Asia ex Japan (GDP
Weighted)
20.0%
90%
90%
Asia ex
Japan (Average)
10.0%
80%
80%
China
Independent Asian Economic & Political Analysis
Jan-11
Nov-10
Jul-10
DSGAsia
Sep-10
May-10
Jan-10
Mar-10
Nov-09
Jul-09
Sep-09
May-09
Jan-09
Mar-09
Nov-08
Jul-08
Sep-08
May-08
Jan-08
Mar-08
Nov-07
Jul-07
Sep-07
May-07
Jan-07
Mar-07
Nov-06
Jul-06
Sep-06
May-06
0.0%
70%
2000
70%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2011
2010
9
Barring further external shocks, Indian inflation should moderate. China may
also succeed in “taming” inflation but more through statistical sleight of hand
China and India: Short Term Inflation Momentum
20%
20%
China CPI MoM 3MMA ann sadj
India WPI MoM 3MMA ann sadj
China: Short Term Inflation Momentum
15%
40%
China CPI MoM 3MMA ann sadj
16%
16%
35%
China Core CPI MoM 3MMA ann sadj
12%
30%
China Food CPI MoM 3MMA ann sadj (RHS)
12%
12%
25%
9%
20%
8%
8%
6%
4%
4%
3%
15%
10%
5%
0%
0%
0%
-4%
-4%
-3%
0%
-5%
-10%
-8%
-8%
00
01
02
03
04
05
06
07
08
09
10
DSGAsia
Independent Asian Economic & Political Analysis
11
-6%
-15%
00
01
02
03
04
05
06
07
08
09
10
11
10
Rebalancing has been only partial thanks to widespread, unreconstructed
mercantilism while decoupling remains more a hope than a reality
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
Asia Exports and OECD Industrial Production
180 40%
180
12%
OECD
Industrial
Production
(RHS)
January 1990 = 100
160 30%
160
Japan
9%
6%
140 20%
140
120
0%
-3%
USA
Asia ex China
ex Japan
3%
120 10%
Euro
Area
100
80
Asia Ex-Japan
Exports (LHS)
100
80
0%
-6%
Asia Ex-Japan Export
Volumes (LHS)
-10%
-9%
China
60
-12%
60
-20%
-15%
USA and Japan IMF Calculations;
Asia* and China DSGAsia Calculations
* ULC-based where available, WPI-based otherwise
40
USD %YoY, 3MMA
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
%YoY, 3MMA
-30%
-18%
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 11
11
The dollar seems cheap against the majors and in line with Asia. But the real
divergences remain within continents. Divergent export performance is the result
Export Volumes (National Accounts Basis)
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
180 180
180
180
Japan
Eurozone
Eurozone ex-Germany
January 1990 = 100
160
160
Japan
140
USA
Germany
Korea
160
160
140
140
120
120
100
100
140
120
120
Non-Germany
Euro Area
100
100
Germany
80
80
Taiwan
60
60
Korea
40
Index Q1 2004=100
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 11
80
80
04
05
06
07
08
09
10
11
DSGAsia
Independent Asian Economic & Political Analysis
12
Japan is the champion government debtor but JGBs have a unique ownership
pattern. It also has plenty of foreign assets to sell should the locals abandon ship
Japan International Assets 2010
(USD6,440 billion)
Sectoral Holdings of Central Government Debt
(December 2010)
Central Bank
8.0%
Private Sector
41.6%
768.9
General Government
10.6%
1,730.0
630.0
(of which Foreign
holdings 5.0%)
Postal Savings
19.9%
Public Financial
Institutions
0.4%
Direct Investment
Equities
Public Life Insurance
9.5%
Public Pension Funds
and CMTs
9.9%
Source: Japanese Government Flow of Funds Data
DSGAsia
Independent Asian Economic & Political Analysis
Bonds
Loans & Trade Credits
871.3
Others
2,439.3
13
Japan should be thought of as a retirement home populated by rich people waiting to die.
The question we always ponder is why the young have not been emigrating in droves
Japanese Household Asset and Liabilities
Japanese Household Savings as a percentage of Disposable Income
24%
24%
Gross
350%
Net (less capital consumption)
21%
21%
18%
18%
15%
15%
12%
12%
9%
9%
6%
6%
3%
3%
0%
0%
DSGAsia Estimates from June 2010
-3%
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 10
DSGAsia
Independent Asian Economic & Political Analysis
-3%
350%
Total Financial Assets as % GDP
Net Domestic Cash as % GDP
Borrowings as % GDP
Borrowings as % DPI
300%
300%
250%
250%
200%
200%
150%
150%
100%
100%
50%
50%
0%
0%
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 10
14
Mrs Watanabe’s massive forex punts are a modern day myth. Home bias
and low risk appetites remain the order of the day
Japanese Household Assets as a Share of GDP
350%
300%
Japanese Household Assets as a Share of GDP
350% 100%
Total Financial Assets as % GDP
Domestic Cash & Deposits as % GDP
Non-Equity Securities as % GDP
4.0%
Equity Securities as % GDP
Insurance & Pension Assets as % GDP
Foreign Assets as % GDP (RHS)
300%
3.5%
80%
3.0%
250%
250%
200%
200%
2.5%
60%
2.0%
150%
150%
100%
40%
1.5%
100%
1.0%
20%
50%
50%
0%
0%
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 10
DSGAsia
Independent Asian Economic & Political Analysis
0.5%
0%
0.0%
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 10
15
China may well be cyclically over-invested but it remains
structurally under-invested. India even more so….
Fixed Investment as a % of GDP
50% 210000
50%
45%
China
Korea
40%
China
Japan
USA
180000
40%
USA
30%
25%
25%
20%
20%
15%
10%
India
45%
35% 150000
35%
30%
USD Capital Stock Per Capita, 2009 Prices
15%
Japan
India
120000
90000
60000
10%
30000
5%
5%
0%
0%
1834 1842 1850 1858 1866 1874 1882 1890 1898 1906 1914 1922 1930 1938 1946 1954 1962 1970 1978 1986 1994 2002 2010
DSGAsia
Independent Asian Economic & Political Analysis
0
1955
1970
1990
2009
16
Their railway build-outs are only beginning
Rail Passenger and Freight Volumes (Latest Year)
Kilometers of Railway Track
450,000
USA
UK
Germany
Japan
China
Australia
200000
400,000
180000
India
400,000
350,000
450,000
2020 Plans:
China 120,000
India 115,000
350,000
Japan: 1.13 million
Passenger Trips per Kilometer
Tonnes of Freight per Kilometer
160000
140000
300,000
300,000
250,000
250,000
200,000
200,000
150,000
150,000
120000
100000
80000
60000
100,000
100,000
50,000
50,000
0
0
1825 1835 1845 1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
DSGAsia
Independent Asian Economic & Political Analysis
40000
20000
0
Australia
China
USA
Germany
UK
India
Japan
17