“It’s very depressing coming to Europe,” one Hong Kong-based fund manager told me the other day. “Everyone seems so much more negative here.”
That may sound surprising. The news we hear from Asia isn’t exactly cheerful. Every week brings another double-digit plunge in exports or production. But there are good reasons why the view from Shanghai doesn’t look like the end of the world.
One reason is that emerging economies are used to dramatic swings. In Europe, this slump is a once-in-a-lifetime upheaval for many. Yet much of Asia has experienced something at least as dramatic or worse in the last 20 years.
The other is that the news over there is now a little better than you might think. Yes, every economy is in recession or a sharp slowdown. But there are shafts of light, in contrast to Europe where things are getting worse and worse …
Chinese real estate is showing signs of life
Take the Chinese real estate sector. The Chinese authorities clamped down hard on this in early 2007 because of concerns about the risks of allowing a serious bubble to build. Construction, sales and prices plummeted and many small developers went out of business. Any bubble was well and truly popped.
When the economy began slowing sharply at the end of last year, the authorities removed controls on real estate lending. The hope was that real estate activity would pick up again, helping to offset the slump in other parts of the economy.
And in the last three or four months, there have been signs that sales are coming back – at least for major residential developers such as China Vanke, who have been reporting stronger sales (commercial real estate still looks pretty bleak).
Now the latest industry-wide numbers suggest quite a strong rebound, at least for the later parts of the property chain – although developers still seem to be holding back on buying new land and starting new projects.
Exports are rebounding too
Things are also looking a bit brighter on the export front. Exports went into freefall at the end of last year as global trade dried up. But the latest numbers from South Korea and Taiwan showed some improvement.
The year-over-year numbers are still very, very negative as they will be for a while, given the scale of the drop. But if we look at the month-on-month change, we can see a sharp rebound in Korean exports – up 21% on January.
It’s always difficult reading Asian data at this time of the year because of the Chinese New Year effect. This holiday sometimes falls in January and sometimes in February, so it can cause a lot of disruption to the usual pattern. This year, Chinese New Year fell in January, meaning we would expect a February rebound in most data.
But if we compare the month-on-month change in exports this year with past years, we can see the rebound was much greater than it usually is when Chinese New Year falls in January (2001, 2004, 2006 and this year). That’s encouraging.
Taiwanese exports show the same pattern. So do Taiwanese export orders, which reflect what will be exported over the next quarter. Encouragingly, there’s a stronger than usual uptick there as well.
And we can look for these signs of improvement at the company level as well. You may remember that I profiled Kingboard Chemical Holdings (HKG:0148), an integrated manufacturer of circuit boards, as an interesting play on the manufacturing rebound when it comes. Unsurprisingly, the firm has just announced a 23% drop in operating profit as a result of the collapse in demand in the fourth quarter (and a 57% cut in the final dividend as a result). However, it reports seeing a pickup in orders in February.
The recession is not over yet
So does this mean that the recession is almost over and the boom times will be back within a month? No. But it may be a sign that some economies are starting to stabilise after the collapse last year. Many companies cancelled orders and ran down inventories when it became clear how bad things were getting. A pick-up in exports suggests that they may now be feeling slightly more confident and rebuilding stocks.
That’s not going to translate into a turnaround anytime soon. For example, Taiwanese exporters have been left with higher inventories as a result of the cancellations, as you can see in the chart below. They’ll probably wait to see if this improvement holds up before boosting production again. Similarly, consumer confidence is at rock bottom in most economies and it will be a while before people are spending freely again.
It’s also important to remember that this is just one or two months we’re looking at. It could just be a brief pause on the way down. But it’s encouraging that it’s taking place across a number of different indicators and economies: as well as the indicators mentioned above, we’re also seeing improvement in others such as Chinese electricity production and car sales and hints that US housing sales may be approaching the bottom.
It’s certainly not the end of the recession. Both this quarter and next quarter are likely to be grim and the year-on-year comparisons will look awful until very late in the year. But it’s the first hint of any improvement and worth keeping an eye on.
The dollar wobbles – but it won’t fall down yet
A couple of weeks ago, I wrote about the surprising strength of the dollar and looked at one explanation in terms of its position as the world’s currency rather than just America’s.
I mentioned a couple of factors that could reverse this – any moves by the Fed to increase the supply of dollars; or a move away from the dollar as a reserve currency. The following week, both hit the news.
First, the Fed announced that it was starting quantitative easing some months sooner than most analysts had expected. Then, Zhou Xiaochuan, the governor of the People’s Bank of China, argued that the dollar should be replaced by a purpose-designed global currency administered by the International Monetary Fund (my colleague David Stevenson summarised his idea here) and you can read Zhou’s statement on the PBoC website here.
This had a big impact on the dollar, which fell sharply against an index of the currencies of its major trading partners (see below).
It’s important to remember that this move was just sentiment: ie currency traders’ response to the news, not the result of a fundamental change in the dollar supply and demand picture. If these events go on to affect the fundamentals, then we can expect long-term dollar weakness. If they don’t, fundamentals will reassert themselves and the dollar will stay strong.
The dollar is living on borrowed time
So how likely are these events to have a big impact? Well, with the Fed, it’s really a question of quantity. If it boosts liquidity enough so that the supply of dollars to the world increases, the dollar will tumble again. Medium-term, there is a real chance of that, especially if they panic about deflation. But for now, the Fed’s moves don’t yet look large enough to make a huge difference in the face of so much deleveraging and shrinking trade deficits – and that argues for continued dollar strength.
What of Zhou’s statement? In the short term, the idea of replacing the dollar doesn’t look viable: it took at least two years of preparation to bring about the Bretton Woods system of fixed exchange rates after the Second World War. And that system was built around the already-dominant dollar.
The situation today is much harder: the dollar is still dominant for good reason (America accounts for a quarter of world GDP) and there’s no consensus on the need for a new system. Indeed, America actively opposes moving away from a dollar standard, which isn’t surprising given how much it benefits from it in terms of its ability to borrow.
Still, it’s interesting that China is raising this issue. And there’s little doubt that the country speaks for a number of countries angry at the way that the US has abused its control of the world’s reserve currency. I can’t see anything changing in the next few years, but this reinforces the fact that the dollar is living on borrowed time.
Turning to this week’s other news …
| Market | Close | 5-day change |
|---|---|---|
| China (CSI 300) | 2,499 | +5.0% |
| Hong Kong (Hang Seng) |
14,120 |
+10.0% |
| India (Sensex) | 10,048 | +12.1% |
| Indonesia (JCI) | 1,463 | +7.5% |
| Japan (Topix) | 825 | +7.8% |
| Malaysia (KLCI) | 885 | +3.3% |
| Philippines (PSEi) | 2,040 | +11.3% |
| Singapore (Straits Times) | 1,746 | +9.3% |
| South Korea (KOSPI) | 1,238 | +5.7% |
| Taiwan (Taiex) | 5,391 | +8.6% |
| Thailand (SET) | 441 | +2.6% |
| Vietnam (VN Index) | 287 | +7.8% |
| MSCI Asia | 78 | +7.6% |
| MSCI Asia ex-Japan | 301 | +9.8% |
India’s Tata Motors was downgraded to a B+ credit rating (four levels below investment grade) by Standard & Poor’s on concerns about refinancing risk on the bridge loans it used to acquire Jaguar Land Rover last year. The launch of its new Nano – the world’s cheapest car – was well-received last week, but despite the publicity the vehicle is unlikely to turn a profit for Tata for several years.
Elsewhere there were hints that credit markets were improving for better-rated borrowers. South Korean steelmaker Posco raised $700m in the region’s first non-government-guaranteed USD bond issue of the year. SK Telecom sold $332.5m in convertible bonds, the first convertible issue in either Asia or Europe this year.
But liquidity remains low for everyone else. Vietnam revealed that foreign direct investment had dropped 70% year-on-year in the first quarter to $6bn. GDP grew at 3.1% year-on-year, the lowest in a decade.
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