In a speech on Tuesday, former chairman of the Federal Reserve Alan Greenspan played down the effect of his words on the world's financial markets. "There's a general view out there that I have more influence than I know I have," Greenspan told a gathering hosted by the Commercial Mortgage Securities Assn. in New York. "I get accused of inducing market changes, really because I was standing next to the market when something else happens."
Given the muted reaction to his recent comments in Asia, Greenspan may be getting his wish about his influence. Despite his warning Tuesday over China's runaway growth, the prospects for increased premiums on emerging market debt, and higher interest rates in developed markets, Asian stocks were little changed on Wednesday.
Indeed, market watchers may have had a sense of déjà vu. On May 24, China stock prices fell only marginally after Greenspan said —the previous day—he was concerned that equities in the world's fastest growing major economy might undergo a "dramatic contraction;" this despite the fact that the comments triggered a minor sell-off in the U.S. (see BusinessWeek.com, 5/30/07, "China's Stocks Tumble Back to Earth").
Less Fear From Housing
In today's trading, China's CS300 index actually closed up 2.1% at 4,118, while Hong Kong's Hang Seng index was down, but only by 0.35%. In Tokyo, bond yields surged to a one-year high following Greenspan's comments, but the benchmark Nikkei 225 index lost just 28 points, closing at 17,732 points. Korea's stock market closed down 0.45% and, in India, the BSE Sensex 30 index was down by less than 1% in afternoon trading.
So why aren't Asia investors heeding Greenspan's warnings? First, the Dow Jones Industrial Average only slipped 129 points to 13.295 in Tuesday trading following the speech—hardly a meltdown. Also, Asian investors are relieved that fears of a slowdown in the U.S. have receded in recent weeks amid signs that problems in the housing market aren't spreading to the rest of the economy (see BusinessWeek.com, 6/18/07, "US: Stop Thinking Rate Cut, Start Thinking Rate Hike").
Perhaps more important, Asia's buoyant economies are becoming less sensitive to swings in sentiment—and high-profile pronouncements—in the U.S., after being emboldened by China and India's emergence as global titans, Japan's prolonged recovery, and growing intra-regional trade.
Export Shift to Other Regions
For sure, most economists believe the success of Asia's economies is less closely linked to the fortunes of the U.S. than a decade ago. "In the past we had a situation where Asia got pneumonia if the U.S. had a cold. No more," says Chang In Whan, chief executive of fund manager KTB Asset Management in Seoul. "The U.S. will still remain a trendsetter, but Asia and Europe will hum along by themselves unless we have a disastrous recession in the U.S."
What explains the shift? Peter Morgan, chief economist for the Asia-Pacific region at HSBC (HBC) in Hong Kong identifies three main factors. First, Asia's exports are less dependent on U.S. consumers than they used to be. Europe and emerging markets in other regions such as Latin America and the Middle East have emerged as important export destinations.
On top of that, Morgan points out, Asia's nominal gross domestic product is approximately three percentage points higher than interest rates, while in the U.S. nominal GDP growth and interest rates are roughly equal. "Monetary conditions in Asia are still quite easy," Morgan says. "This is having quite a positive impact on growth in the region." Throw in growing demand from Asian consumers, and it's clear why the region should be less reliant on the U.S. than it used to be.
Continued Recovery in Japan
Those factors hold true across much of the region. In Japan, Asia's biggest economy, interest rates are just 0.5%, compared to an annualized growth rate in excess of 3% during the last quarter, while exports to the U.S. are down on a year-on-year basis, and shipments are rising to Europe and other markets. And China last year overtook the U.S. as Japan's largest trading partner (see BusinessWeek.com, 4/25/07, "China Tops U.S. as Japan Trade Partner"). "For Japanese companies, Asia and Europe will offset any falls in demand in the U.S.," says Masanobu Kaizu, head of Nomura Securities Financial & Economic Research Center.
Even consumer demand, so far the missing ingredient in Japan's recovery, is finally showing some signs of health. Household spending rose 1.1% year-on-year in April, the fourth consecutive increase. And while deflation persists, falling unemployment—the Japanese jobless rate hit a nine-year low of 3.8% in April—is finally expected to lead to wage increases soon, which could boost spending further.
Korea is also benefiting from a diversified export base. While the U.S. remains a large market for companies like Hyundai Motor and Samsung Electronics, its share of Korean exports is 15% compared to China's 22% and to 52% for Asia as a whole. "In the 1990s the world had relied on one engine for growth but now we have multiple engines," says Shin Dong Suk, economist at Samsung Securities in Seoul.
Asia More Service-Oriented
Shin adds that the effect of a downturn in the U.S. on the region will be limited in Asia unless the Fed takes radical steps to raise rates sharply and risks pushing the U.S. economy into a recession. "We should remember that we are not really talking about a severe economic slowdown in the U.S. A soft landing will only have limited impact here," he says.
Changes in the structure of Asian economies may also make them more indifferent to changed sentiment among U.S. investors. Daryl Goh, an equity strategist at Credit Suisse (CS) in Hong Kong, says Asian economies have a far more diversified earning base than emerging markets in Eastern Europe and Latin America.
The growth of successful software companies, insurers, and other non-resource-based industrial companies such as Korea's LG Electronics and Hyundai, and Taiwan's Hon Hai suggest that these markets occupy "the space between emerging and developed markets." That means global investors are less likely to take money off the table there than they would be in less developed markets when perceptions of emerging market risk are on the increase.
The Europe Factor
Nevertheless, not all Asia-watchers are convinced that, as regional demand has risen, the region has permanently decoupled itself from what happens in the U.S. Credit Suisse's Goh argues that domestic demand in the region has become relatively more important because of where Asian economies are in their economic cycles. In the lead-up to the Asian crisis in the mid-1990s, Asia growth outside Japan was largely domestic-driven. After the crisis it was export-driven and linked to the telecom boom.
Others point out that while the region may appear less dependent on the U.S., that's balanced out by the growing dependence on Europe. Ultimately, that could mean Asia's economy is just as open to a downturn in global export demand as before, particularly if falling confidence in global markets spreads to domestic consumers in the region.
"There has been a positive wealth effect from stock market and higher property prices and we've seen relatively strong growth in incomes," says Michael Spencer, chief economist for Asia at Deutsche Bank (DB) in Hong Kong. "But the question is would that continue if the export cycle turned down? My answer is no." For the time being, though, investors in Asia can perhaps afford to pay less attention to Greenspan's pronouncements.