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Asia’s most dynamic economies are amassing huge cash fortunes that they can then wield to increase their power around the world. Will 2008 be the year when we t ruly see the balance of global power shift to the East?
But it may not take that long for economic power to shift toward the East. Some observers suggest that China and India are moving toward their long-term potential faster than anticipated and that a substantial shift in the balance of economic power to the East is already under way. “There has been a major shift toward emerging markets, particularly in Asia, which is growing faster than most economies,” says Nicholas Kwan, regional head of research for Asia at Standard Chartered Bank. “In that sense you can argue [that power has shifted] in relative terms toward China and other parts of Asia. And increasingly they are taking a bigger share of world GDP.”
In 2006 GDP for the whole of developing Asia grew at 8.3%, the fastest rate of growth since 1995, according to the Asian Development Bank. India’s economy has been growing by more than 8% a year for the past four years, four times the growth rate of the UK and three times that of the US. China has seen annual growth increase from 7% in 1999 to more than 10%. Kwan says a more sophisticated measure of economic power is purchasing power parity, and by that measure the US is still the dominant power, accounting for one-fifth of global GDP. He estimates that China and other parts of Asia, excluding Japan, account for somewhere between 25% and 30% of world GDP.
Michala Marcussen, head of economic strategy and research at Société Générale Asset Management (SGAM), explains that economic power is building in Asia as investor sentiment toward emerging markets undergoes a fundamental shift. “Go back 20 years, and emerging markets were something most UK pension funds would not have considered investing in,” she says. “The way people look at these markets has changed significantly.”
But while Asia’s star is in the ascendant, Marcussen says the US still remains the “economic superpower” because of its military supremacy and the sophistication and strength of its financial markets. “China is not going to surpass the US by that measure anytime soon,” she says. “China is an exciting story, but we have to be careful not to get ahead of ourselves.” According to McKinsey, in the next decade Asia is poised to rival and potentially surpass Western Europe as a pool of financial-services revenue. It estimates that from 2005 to 2015, Asia could contribute more than 27% of projected global growth in financial services, up from its 13% contribution between 2000 and 2005. McKinsey says potentially Asia could achieve close to 30% of global revenue pools, depending on consumption patterns among the projected 800 million new middle-class individuals and on the globalization of Asian companies.
Growth Delinks from Exports
When it comes to industrial output, a clear shift away from the West to the East is already taking place. McKinsey predicts that by 2015 there will be a significant shift toward Asia in steel, chemicals and computers, with more than 70% of computer output coming from Asia. Historically, the fortunes of many Asian economies have been tightly linked to the US economy. But the old adage that “when America coughs, the rest of the world sneezes” is losing its relevance in Asia.
Contrary to popular belief, Jonathan Anderson, an economist with UBS, maintains that China is not as exposed to the US as some may think. “We estimate the ‘true’ export share of production-side GDP at 9%—orders of magnitude less than in China’s smaller neighbors—and historically even the largest negative export shocks only have a moderate impact on domestic growth,” he stated in a recent economic analysis of China. UBS expects real export growth for China to fall to 15% or lower in 2008 on the back of US consumer weakness and a slowing global economy.
However, Anderson says that China will remain one of Asia’s fastest-growing exporters, and it will continue to gain market share, particularly in low-end and mid-level processing and assembly functions. “We don’t expect a global downturn to derail China’s current buoyant momentum,” he says. “In our view, it would take a very large external shock indeed to have a significant impact on growth at present.”
As Asian economies become less dependent on trade and more reliant on internal investment for growth, the region is becoming known not only for the products it exports to the rest of the world but also for its own consumption of resources, which is giving rise to a new, more powerful consumer class. According to UBS, one of the biggest structural trends of the past five years is the recovery in Chinese rural incomes and spending, with an associated pickup in retail sales and inland growth, gains it expects will continue over the next half-decade.
McKinsey predicts that, between 2005 and 2015, more than 540 million people in India and almost 270 million in China will emerge as a new class of consumers. “China has the strongest potential consumer market in the world,” observes Karl Alomar, co-founder and CEO of China Export Finance. “The middle class is becoming increasingly wealthy, and there are new millionaires among manufacturers and exporters.” According to CapGemini and Merrill Lynch’s 2006 World Wealth Report, the highest growth in terms of the population of high-net-worth individuals (HNWI) in 2005 was in South Korea (21.3%) and India (19.3%). HNWI financial wealth in Asia is expected to grow at an annual rate of 6.7%, outstripping the global rate of 6%.
On the consumption side, though, there are major differences between India and China. According to McKinsey, in 2005 the share of private spending of GDP was 62% in India compared to 39% in China. The much lower rate in China is attributed to high domestic savings rates and a lower proportion of GDP going to households as a result of lower wages and slower job creation.
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Alomar: China has the strongest potential consumer market in the world. |
But while per capita consumption is still lower in Asia than, say, the US, the potential for future growth is mind-boggling. “The most impressive thing about [China and India] and the thing that unites them is population,” says David Smith, economics editor at the UK Sunday Times, in his latest book, The Dragon and the Elephant. China and India have a combined population of 2.4 billion people, almost half the world’s population. Studies suggest that in quantitative terms the emergence of India and China is the “biggest shock” the world economy has had to absorb. A bountiful supply of cheap and skilled labor is why China has become the workshop of the world and India the global back office, and other Asian countries hope to emulate that success. “In areas like manufacturing, the shift toward Asia has already occurred,” says Dominic Barton, chairman of McKinsey Asia. “In the next 20 years the shift will be felt in many other areas.”
Even in the face of emerging competitive markets, rising costs and quality concerns, Alomar says China’s key competitive advantage remains its vast labor pool, which will continue to ensure its dominance in manufacturing. And although labor costs in India and China may be rising, Kwan of Standard Chartered says that it will be years if not decades before they are on a par with the West.
As demand for goods made in Asia grows and the purchasing power of Asian consumers increases, the region is producing its own corporate titans. McKinsey points to companies such as China Mobile, whose market cap increased from $65.5 billion in 2000 to $103.7 billion by May 2006. Even more remarkable has been the rise of Indian corporations such as Tata Motors, whose market cap increased from half a billion US dollars in 2000 to $6.5 billion in May 2006. India’s ICICI Bank has seen its market cap go from just over half a billion US dollars in 2000 to $10.3 billion by May 2006.
In their efforts to become global brand names, well-capitalized Asian companies are also asserting themselves on the global stage. High-profile examples include Tata Steel’s acquisition of Anglo-Dutch steelmaker Corus Group for $12.2 billion and Chinese mining companies’ rumored pursuit of Anglo-Australian giant Rio Tinto. Barton says that Chinese and Korean companies are also investing in other parts of Asia, which will facilitate the development of more-liquid local capital markets.
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Barton: Trade protectionist measures are unlikely to bring China to its knees; it is more resilient and independent |
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