Today, on October 13th, the IMF published its Regional Economic Outlook. The IMF analysts warn that the eurozone debt crisis and the US economic slowdown may seriously affect the Asian-Pacific region.
Do the analysts exaggerate the threat for Asia? As you remember, the Asian “dragons” managed to come out of the latest global economic crisis relatively unscratched. The global economy saw a 2.2% decline while China and India’s economies grew by 8.8% and 6% correspondingly. Most developed countries can only dream of such economic performance even when there is no global or local crisis.
So is there really a threat of the US and eurozone crises spreading over Asia? What does it mean for investors?
What are the threats for Asian investors?
According to , these are the major factors named by the IMF:
· The economies of the Asian-Pacific region are deeply integrated into the global economy. That is why sooner or later Asian economies will feel the pressure caused by the EU and US economic problems.
· Major Asian economies are export-oriented (mainly towards the US and Europe). A decline in the demand in European and US markets will cause many problems to Asian exporters.
· If Asian exports decline, this will lead to overproduction, thus making Asian economies overheated. This may also lead to stagnation of financial flows, thus making Asian financial institution toughen lending conditions.
· Numerous problematic European and US banks may well reduce their international lending services, which will inevitably affect Asia.
The experts note that Asian banks are seeing a decline in the demand for business loans. For example, in Singapore the volume of business lending has already declined by 72% as compared with 2010, in Australia - 17%, Indonesia - 18%, China - 76%.
What is Asia’s degree of economic safety?
Nevertheless, the IMF report says that Asian economies can boast substantial “safety cushions”:
· The Asian economy is so powerful that can become a locomotive dragging the entire global economy out of the slump.
· The current exchange rate of the Japanese Yen is currently not threatening Japan’s economic recovery. The latest data provided by the Bank of Japan show that the tendency of economic recovery has consolidated.
· Asian countries have accumulated substantial gold-and-currency reserves. Moreover, in order to overcome potential difficulties Asian financial regulators can reduce or temporarily eliminate numerous economic stimuli – interest rates, currency rates etc.
The analytic team of MIG Bank provides some more arguments in favor of the stability of Asian markets:
· In August Standard & Poor’s published a report, which includes 4 major reasons for the stability of Asian economies: stable internal demand, fairly high external liquidity, high saving rates and relatively healthy corporate sector.
· According to June’s report published by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Asian economies have completely recovered from the consequences of the global crisis. Last year the GDP growth reached 8.8%. This year it is expected to reach 7.3%. It is less than in 2011. Nevertheless, the growth is sound.
· The Chinese authorities spent as much as $600B to stimulate the internal consumption in order to make up for a possible export decline. It should be noted that the population of the Asian-Pacific region exceeds 3.5 billion people, which is a huge internal market.
· Historically, governments of Asian countries play the key role in regulating national economies.
· After the major Asian crisis (1997) numerous countries of the region developed effective anti-crisis programs. During the 9 months of 2011 China’s export (y/y) increased by 17.1% despite numerous gloomy forecasts.
These days, analysts expect the Chinese economy to catch up with the US one by 2020 while in the middle of the 21st century China’s economy is believed to be twice as big and powerful as the American one.
In autumn 2008 George Soros, the famous billionaire and investor, said that the shift of power towards China would become possible due to numerous sins the US authorities had committed during the previous 25 years. During the mentioned period, the USA and Europe were consumers rather than manufacturers, thus accumulating huge public debts. Asia, on the contrary, was producing, saving and accumulating. According to Mr. Soros, when China turns its dollar reserves into “real assets”, the balance of power in the international arena will undergo dramatic changes.
Is Asia really too dependent on the global economy?
However, something is rotten in the “state of Asia”:
· In August the HSBC Emerging Markets Index showed that China’s manufacturing sector had declined for the first time since the winter of 2008-2009.
· High prices on energy carriers and foodstuffs as well as unstable financial inflows may cause some major problems to Asian businesses.
· The series of devastating natural disasters seem to have removed Japan, the world’s 3rd biggest economy, from the list of global economic powers, at least for several years.
· It takes time to reorient any economy from export to internal consumption. It either forces authorities to reduce/ eliminate the export-oriented capacity or to support them until the external demand recovers.
Since early 2011 the common Euro currency has lost 14% of its value, thus devaluing China’s currency reserves by 3-5%. experts say that if the crisis does spread over Asia, the worst consequence will be the division of the global economy into regional ones. Asian “tigers” and ‘dragons” may abandon global economic ties and reorient their economies towoards domestic markets.
USDCNY and USDJPY: prospects for traders and investors
According to the Department of Masterforex-V Trading System , USDCNY has completed a downswing- wave a(C ) or shortened C of Daily. If the MF pivot 6,3984 isn’t broken, the long-term downtrend will be continued in the form of a strong downswing - wave c(C ). A trend reversal can be considered after the price overcomes the MF pivot and sloping channel (as shown below):
According to the Department of Masterforex-V Trading System , after the latest currency intervention USDJPY still retains the possibility of starting a bearish wave c(C ). The possibility will remain as long as the MF pivot 77,85 stays unbroken. In this case the closest level of support will be found at 75,94 (the local low). Once the pivot is broken, which is followed by a bullish FZR, USDJPY will start forming a retracement wave of a bigger wave level.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following questions:
Are Asian economies under the threat of getting into the slump?
