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Asean will not be spared

Publication Date : 22-04-2014

 

A weakened China’s economy could affect its demand for imports, which could tip the regional bloc into a major slump.

A financial crisis – and I’ve lived through two of them –creeps up on you.

Amidst all the reports about record-busting initial public offerings, champagne sales and the latest Louis Vuitton boutiques, you start noticing less favourable news stories.

At first they seem unconnected: the sudden collapse of housing prices in Stockton, California, the troubles of an obscure but surprisingly large German provincial bank, a small town going bankrupt in Florida and features on phrases such as “negative equity”.

Maybe I’m being unduly paranoid but I’m beginning to get a similar sense each time I read the business news emanating from China.

Indeed, two months ago, I wrote about China’s shadow banking problem (“China’s shadow banking”, February 11) – highlighting disturbing parallels to the United States financial services industry pre-2008 crisis.

Since then, the trends seem to point to an imminent slowdown of China’s economy.

In March, China had its first default in the onshore bond market since the government started regulating the sector in 1999, after a relatively obscure solar panel manufacturer Shanghai Chaori Solar defaulted on interest payments for a 89.8 million yuan (US$14 million) coupon.

Last week, China’s finance ministry conducted a bond auction.

Bond sales are important: they are increasingly seen as a vote of confidence (or no confidence) by investors.

Now, there was a time in the last decade when domestic and international buyers would scramble for China’s bonds.

For the first time in nearly a year, however, the government failed to sell all of the bonds offered.

Only 20.7 billion yuan of one-year debt were sold, less than the targeted amount of 28 billion yuan.

Moreover, the average yield of 3.63% was also higher compared to the yield on similar maturities available, which was at 3.32%.

So, what went wrong for China?

Some analysts argue that it was the timing of the bond auction.

Given the fact that liquidity conditions are healthier and that China’s central bank is eager to avoid another cash crunch, most investors anticipated an increase in rates in April and May, resulting in the lower-than-expected demand for bonds.

In June last year, China’s government failed to raise its planned amount from debt sales – which eventually resulted in a cash crunch which had shaken the global markets as the Asian giant’s money market rates reached 10.77%.

This failed bond auction adds more pressure to the government as it tries to bring down its debt level – which has risen to about 220% of its gross domestic product (GDP), putting the country’s financial stability in danger.

Indeed, China’s government recognises the problem and has been taking measures to slow the build-up of debt.

Giving out cheap financing has been made harder for banks and there have been moves to clamp down on shadow banking.

However, such tightening measures could bring down the level of inflation in China – which means economic growth will be hindered.

The consumer price index (CPI) rose by 2.4% in March from the same period last year, but it’s still below the 3.5% of inflation level targeted by the government in 2014.

Meanwhile, the producer price index (PPI) fell by 2.3%, extending the decline to 25 months – signalling weakening demand in the economy.

Despite the assurance from Chinese Premier Li Keqiang that China could still achieve its targeted 7.5% economic growth without additional stimulus programme, many believe that it’s an unjustified sense of optimism.

In fact, China’s economy only grew by 7.4% in Q1 2014 – the slowest pace in 18 months.

And when China sneezes, South-East Asians “contract” pneumonia.

Even though Asean has a combined Gross Domestic Product of $2.1 trillion, we will not be spared from a Chinese slowdown.

Trade between China and Asean has jumped by 10% to $400 billion in 2013.

Within the next eight years, two-way investment is predicted to reach $150 billion.

So what would happen if China went into a meltdown?

Of course, the China “bulls” are convinced that Beijing’s financial wizards would never let that happen.

That’s what everyone said of the Federal Reserve in 2008.

China is an important consumer market for Asean just as much as the latter is vital for the former’s manufacturing sector.

A weakened China’s economy could affect its demand for imports from Asean, which could tip the regional bloc into a major slump.

So while Southeast Asia gears up for the formation of the Asean Economic Community (AEC) in 2015, the region could potentially be in for a perfect economic storm if the problems in China worsen.

As I’ve said earlier, one year was all it took for the crisis to escalate back in 2008.

Perhaps the countdown for the next great crisis has just started.

At any rate, the time for us to put our house in order has come.

 

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