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Monday, Oct. 24, 2011

SENTAKU MAGAZINE

Ill omens for Asian economies

Even though Asia is still perceived to be the global economic growth center, there are signs of potential dangers of the regional economy heading toward a collapse because of a vicious circle of inflation and wage increases brought about by huge sums of speculative money being poured into Asian countries.

On the surface, Asia may appear to be assured of continuous high economic growth for the next 10 to 20 years, judging from brisk public-works projects and expanding sales of foodstuffs, daily necessities, home appliances, motorcycles and cars, as seen not only in China and India but also in nearly all other parts of the region, such as Vietnam, Thailand and Indonesia.

A closer look, however, would reveal that both policymakers and business leaders in Asian countries are investing their money without any purpose or target, as they are deluded by the "myth" of growth created by industrialists and financiers in the advanced nations.

The inflationary trend is the best indicator of dark clouds that have started hovering over the future of the Asian economy. In China, for example, the consumer price index (CPI) rose by more than 6 percent for third straight month in and after June, while the wholesale price index (WPI) in India went up 9.8 percent in August and Vietnam's CPI shot up by 22.2 percent in July.

Inflation is often regarded as a price which developing nations have to pay for achieving high economic growth. However, the problem is that price increases now faced by the Asian countries do not fall into the category of "bottleneck inflation," which could be remedied rather easily by either expanding production capacities or tightening monetary policies.

Rather the current inflation in Asia is more of an economic bubble resulting from excessive liquidity in the countries of the region caused by influx of huge sums of speculative money from investors in the industrialized parts of the world who believe in the growth myth, and by the Asian governments' easy money policies and boosting of fiscal expenditures.

The economic circumstances surrounding Asia at present may look similar to the events leading to the 1997 Asian monetary crisis, which was triggered by a sharp drop in the value of the Thai baht. But the situations then and now are distinctly different in three ways.

One is that the amounts of speculative money flowing into Asia from the rest of the world this time are so large that they are far beyond the control of the governments or central banks. Second, unlike in the 1997 crisis, when speculative money, once withdrawn from Asia, easily found alternative destinations, the excess money today can find no other place to move into because of serious sovereign debts risks faced by Japan, North America and Europe. Third, the countries in the region have all improved their international balance of payments in such a way that they now have accumulated huge foreign-exchange reserves.

Under these circumstances, surplus funds cannot find other destinations for good investment opportunities and are likely to harm the real economy of the Asian region.

Excessive liquidity has poured into economic segments like construction, real estate, raw materials and agriculture, leading to economically unreasonable price increases spreading to various areas, including housing, foodstuffs and durable consumer goods.

As a natural consequence of these inflationary trends, there has been a mounting demand for raising wages. The Vietnamese government, for example, has increased the minimum wage three times since last year. As a result, the average wage has shot up to $120 per month in Ho Chi Minh City and to $100 in Hanoi. In the relatively well developed coastal regions of China, factory workers are now making around $300 per month.

These rising wage levels have led corporations in advanced nations to shift their manufacturing facilities to areas within Asia where wages are lower. One example is Uniqlo Co., a leading Japanese producer and seller of casual wear, which is seriously considering building a new factory in Bangladesh, which, along with countries like India and Myanmar, is known for offering much lower wages than China.

Even in Bangladesh and India, workers resorted to large-scale strikes this past summer, demanding higher wages. The auto plant of Maruti Suzuki India Ltd., a partial subsidiary of Japan's Suzuki Motor, had to suspend production in India for several days as a result. This came close on the heels of nationwide labor disputes in China last year, which forced Foxconn Technologies Group to double the salaries of its factory workers in China.

Despite such wage increases, China has so far failed to shift its industry to more sophisticated and high-value added segments, as its manufacturing facilities are still engaged in labor-intensive processes. This has resulted in deterioration of the balance sheets for many corporations, as they are forced to sacrifice profits in order to maintain their competitiveness. Only state-owned monopolies seem to remain prosperous.

While Japan, South Korea, Taiwan and Singapore have succeeded in transforming their industrial infrastructure from a labor-intensive type to a high value-added type, nothing of this sort has happened in China. Its growth is driven by government-led infrastructure construction, not by innovation or a rise of labor productivity.

The entire Asian region is now stuck with a vicious circle of inflation pushing up wages, which in turn pushing up industrial costs and eventually prices of products, resulting in an inflationary spiral, in which price are rising faster than nominal wages.

The most serious threat that most Asian countries face today is the collapse of economic bubbles, which would be more similar to what Japan experienced in 1991 than to the 1997 Asian monetary crisis. The first country most likely to be hit by such collapse would be China.

Many investors outside of Asia appear to be optimistic about China, thinking that there will be little or no possibility of an economic crisis happening during 2012 when the Communist Party Congress is scheduled to be held. At the party congress, President Hu Jintao will step down and Xi Jinping will succeed him. But these investors must carefully analyze whether China has the ability to control its economic bubble. At the same time they should remember the precedent of Japan, which failed to prevent the disastrous consequences of the bursting of its bubble.

Other Asian countries will not be able to soft-land their economic bubbles either. The inflationary trend accelerating in many parts of Asia augurs ill for Asia's economic future. A crisis much more serious than the 1997 Asian currency crisis could happen. If it happens, it will take several years before the Asian regional economy gets out of the confusion.

This is an abridged translation of an article from the October issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.


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