asia growth

8/8/2019 Asia Growth

1/16

AsiaNow

in this issue

3 Looking Outward

5 Is China Laying the Foundation or

a Fully Convertible Currency?

6 Turning Inward

9 Koreas Online Education Stars

12 Koreas Evolving Bond Market

13 Asian Banks: Agents o Growth

16 The Changing Patterns o Global Growth

The Growth IssueThe global fnancial crisis may give Asias largest economies the opportunity or a more

balanced relationship with the Westi they can generate and sustain growth internally.

towards a new Model

I the automobile has long been considered a symbol o American inde-

pendence, and the auto industry a barometer o the U.S. economy, the

ironies evident at the 2009 Shanghai Auto Show are hard to ignore.

Historically a showcase or oreign cars, this year the spotlight shited to

Chinas own rapidly growing auto industry. China is now the worlds largest

car marketwhile U.S. car sales were down 34% in March, Chinas hit an all-

time high. No wonder more than one major European automaker chose to

debut their newest models not in Detroit or Tokyo, but in Shanghai.

Investing in oreign securities may involve certain additional risks, including exchange-rate uctuations, less liquidity, greater volatility and less regulatio

Single-country and sector unds may be subject to a higher degree o market risk than diversifed unds because o concentration in a specifc secto

or geographic region. The inormation contained in this article does not, in any way, constitute investment advice and is not reasonably sufcient o

which to base an investment decision. The inormation does not constitute a recommendation to buy or sell any securities mentioned.

2009


2/16

2 ASIANOW | The Growth Issue

Not content with just being the largest market, however, China is

determined to be the most innovative. The government has put its muscle

behind mass production o electric and energy ecient vehicles, many o

which were on display at the show. Some observers believe that Chinas

green drive could leave the U.S. playing catch-up in an industry with

which it has long been identied.

the asian PersPective on asia

The shiting shape o an iconic industry is an apt metaphor or a larger trans-

ormation taking place between East and West. Postwar Asias economic ortunes

have long been linked to those o the West, particularly the U.S. When the U.S.

economy altered, so did Asias; when it boomed, Asia shared. Asia has not been

unaected by this latest global crisis, but while many Western economies stalled

or broke down altogether, Asias expansion merely slowed.

To the extent that Asias growth slowed, it was not due to excessive credit

exposure, sub-prime loans or overly exotic investment products, as it was

in the West. Instead, the Wests economic woes dried up Asias prime export

markets. Asias domestic consumption, however, has largely picked up the

slack: in China and India, domestic spending has increased by annual rates

o more than 5% during the global downturn.1

Increasingly, Asias economies are likely to grow (or slow) with less

regard to the ebbs and fows o the Wests. This is sometimes reerred to as

Asias decoupling, a slightly misleading term, since what Asia seeks is not

the isolation or disengagement o old ties but a more balanced economic

relationship. For Western investors in Asia, this means starting to view

Asian markets rom an Asian perspective.

GettinG asians to Buy asian

The biggest lesson o the current crisis or Asian countries is that they can

no longer depend on the West as a market or their exports, nor or reliable

returns on their investment capital. To address the rst issue, Asia has to cul-

tivate its domestic consumer markets to sustain its growth. For the second,

it aces a potentially more daunting challenge: to grow and strengthen its

domestic capital markets, and stimulate Asian investment in Asia.

Should Asia achieve these goals, it would mark a undamental shit in

the economic relationship between Asia and the Westand in particular

between China and the U.S. This issue o AsiaNow examines the orces, both

external and internal, that are shaping a new growth model in Asia.

Asian countries

can no longer depend

on the West as a

market or their

exports, nor or reliablereturns on their

investment capital.

Growth driver The2009 Shanghai Auto Showdrew 600,000 attendees.Chinas auto industry is

driven by a governmentpush or clean-energy cars.

1 Can Asians replace Americans as a driver o global

growth? The Economist, June 25, 2009. Source: HSBC


3/16

ASIANOW | The Growth Issue

Asias rapid growth in

recent years relied heavily

on engagement with more

developed Western

economies. Now, the

terms o engagement are

changing prooundly.

the end of the u.s. suPerBank

W

hile Asiaand China in particularhas modernized at a rapid

rate, its internal capital markets remain largely underdeveloped.

This explains in part the abundance o capital that Asia has invested in the

U.S. capital that had nowhere to go domestically. Where Americans are

spenders, Asians have tended to be savers, resulting in huge amounts o

capital sitting idle and seeking to be productive. In the past, Asians have

looked to the U.S. as a dynamic economy, with deep, liquid capital markets

and good rates o return. The U.S. dollar was seen as a sae haven or

Asias vast accumulation o savings.

At the same time, Chinas drive to commercialize necessitated engage-

ment with the West and led to the development o exporting industries. U.S.

dollars earned through exports wound up in the governments hands as a

means o currency management, turning the government into a major saver

o U.S. dollars in its oreign exchange reserves. That money, too, ound its

way back to the U.S. in the orm o Asian investment, mostly in low-risk in-

struments such as short-term Treasury bonds. Comparatively little went into

longer-term treasuries, let alone corporate bonds or direct investment.

uPward Chinas big banks loom brightlyover the Hong Kong Legislative Councilbuilding. Asian banks ared better thanothers in the global credit crisis.

Looking Outward


4/16


The U.S. nancial system, thereore, had a huge infow o Chinese sav-

ings, which needed to be put to work. Much went to und the U.S. domes-

tic consumer credit binge, while some was invested overseas.

The U.S. served, in eect, as Asias superbank, along an investment

banking modelborrowing short-term through Asian purchase o treasuries

and lending long-term in the orm o credit, oreign equity and oreign direct

investment. The spread between the higher returns it earned and the low

interest it paid to China was airly wide, which is why the U.S. was able to run

a large current account decit (the dierence between domestic saving and

investment) until recently.

The symbiotic relationship between the U.S. and Asian economies was

urther held together by trade. In essence, Asia loaned money to the U.S.

that allowed the U.S. to buy Asian goods. Or, as one veteran Asia researcher

put it, Every Asian car sold in the U.S. comes with a check attached to the

windshield to cover the purchase price. The U.S. could aord to run trade

decits so long as it enjoyed investment surpluses.

Combined with Asias xed exchange rates, the arrangement meant

that Asias economies were largely infuenced by U.S. monetary policy. The

high degree o correlation between the U.S. and Asian economies meant

that, in the past, investors may have elt there was little scope to reduce

risk through diversication into ostensibly emerging markets.

These attitudes may be changing. Now, in the wake o a worldwide

economic upheaval that originated in the U.S., the traditional model o

interdependence may be broken. The excessive household debt in America

has stifed consumer spending on Asian exports.Bloomberg News reports

that Chinas exports worldwide dropped or the eighth straight month in

June, down 21.4% compared to a year earlier. The countrys trade surplus

shrank to $8.25 billion, the lowest in two years.2

Like some o the abled Wall Street institutions brought down by the

crisis, the U.S. superbank model appears to be collapsing, as it can no

longer be assured o cheap unding rom China. U.S. assets are no longer

the sae haven they were once thought to be. And the dollar has weak-

enedto the point that China has called loudly or a new world reserve

currency that is disconnected rom individual nations.

So why is China sitting on some US$2 trillion in U.S debt, when surely

there are returns to be earned in China? The answer lies in whether or

not China can eectively replace the superbank model within its own

economy, a subject explored urther in the pages that ollow.

The U.S. superbank

model appears to be

collapsing, as it can

no longer be assured

o cheap undingrom China.

liGhter loads Chinesecontainers wait to beunloaded in Miami. Withthe credit crunch stiing

export markets, Chinamust reshape its economy.

2 Chinas Exports Slide or Eighth Month as Import Decline

Slows, Bloomberg News, July 10, 2009


5/16


The crisis in the U.S. nancial system may spur Asias governments to

accelerate the reorms and evolution o their own nancial systems.

Currencies will play an increasingly important role in this transormation.

As the world seeks to work through the imbalances in global economic

relationships, currency movements can act to smooth and acilitate a coun-

trys transition rom spender to saver and the changes in the patterns o

economic development that implies.

Yet one o the key currencies that could help smooth the transition, the

Chinese renminbi (RMB) or yuan, is not reely tradable and is thereore un-

able to perorm that unction.

Chinas Central Bank governor, Zhou Xiaochuan,

pointed to the need or a new super-sovereign reserve

currency to replace the current system, which relies

too heavily on the health o a single countrys nancial

system (i.e., the U.S.) China worries that its nearly $2

trillion dollars in short-term, sae U.S. Treasuries will

generate a huge capital loss should the dollar depreci-

ate. And i the U.S. starts to save more, depreciation

pressures may build. At the same time, politicians and

economists in the U.S. have been calling or a dramatic

appreciation o the yuan to give Chinese citizens the

buying power to acquire U.S goods.

Neither the super-sovereign reserve currency nor

the abrupt appreciation o the yuan appears likely

to happen in the near term. Nevertheless, China has

taken the rst small steps to reeing up its currency.

The government is allowing our cities to settle international trade with

Hong Kong in yuan. This move will encourage trading partners to start

holding yuan accounts, and will likely spur the development o a yuan-

based nancial system in Hong Kong.

The undamental reason or holding currency is to make transactions.

Financial markets, in turn, develop around this need because it is impracti-

cal and inecient to settle transactions in cash. Hong Kong has the nancial

and legal inrastructure to create nancial markets around the yuan. Chinas

central bank has announced it will allow more oreign institutions to sell

yuan-denominated debt in China and encourage domestic banks to raise

yuan-denominated unds in Hong Kong. Are these the rst tentative steps to-

ward a trade nance and investment system independent o the U.S. dollar?

Is ChinaFinallyReady toRelax its

Currency?

is chinalayinG thefoundationfor a fullyconvertiBlecurrency?

ProtectionisM China isexperimenting with loosercurrency trading restrictionsin Hong Kong.


6/16


With the global nancial crisis driving down world demand or Chi-

nese products, and returns on its overseas investments dwindling to

near zero, China is looking to increased domestic consumption and internal

investment as the answer or economic growth and stability. For that to occur,

however, China must accelerate the pace o development in two critical areas:

Social welare: A stronger saety net encompassing health care, educa-

tion and the pension system is seen as easing consumers dependence on

their own lie savings and stimulating spending.

Capital markets: In contrast to the West, Chinas capital markets are

underdeveloped, inecient and weakly regulated. Stronger and deeper

capital markets are critical to increasing domestic investment.

BuildinG chinas social safety net

A notable drag on domestic consumption is the Chinese propensity to

save rather than spend. The countrys savings rate is among the highest in the

world, reaching 51.2% o GDP in 2007. Lack o credit and income inequality are

Getting Asians to buy

Asian is only part o the

challenge. Asian countries

must reorm their institutions

to stimulate investment

and instill long-term

consumer confdence.

Turning Inward

the BiG Picture Shopping or Korean-brandtelevisions in China under a government-subsidizedtrade-in program. The Chinese government isactively promoting domestic consumption.


7/16


Growth PainsIndian medicaltechnicians perormradiation therapy.

India has one othe highest rates opatient-paid healthcare costs in theworld.

A stronger saety net

encompassing health

care, education and

pensions may ease con-

sumers dependence ontheir own savings and

stimulate spending.

among the major reasons or the Chinese thrit habit. A weak social saety net,

however, has an undeniable impact. Fearing or their nancial security, Chinese

citizens are compelled to horde cash as a precaution against the unexpected.

Beore the 1990s, many Chinese were employed by state-owned enter-

prises (SOEs) and depended on cradle-to-grave security under the social-

ist system. The welare system was airly comprehensive, with child care,

education, housing, health care and pensions. But when the government

began restructuring and privatizing inecient SOEs in the 1990s, many

workers lost their jobs, along with these benets.

fixinG health care

A glaring weakness o Chinas social saety net is its health care system.

Out-o-pocket payments make up about 50% o all health care spending

and commercial health insurance is still in its inancy. Saving or medical

expenses inevitably puts pressure on households and hinders consumer

spending. Chinas health care system is still largely operated by the state,

and its health resources are woeully insucient, particularly in rural areas.

Total health care spending accounts or only about 6% o GDP, compared

to about 16% in the United States.

To make health care more accessible and ecient, China has pledged

to overhaul its health services and insurance systems. A health care reorm

proposal sets the ambitious goal o achieving universal health care by 2020.

In January 2009, the government passed a $124 billion plan to revamp

health care inrastructure and provide insurance coverage to 90% o the

population by 2011. This should support growth in such industries as phar-

maceuticals, medical equipment, hospital services and insurance.

assurinG MiniMal livinG standards

Chinas eorts to improve its social welare system have included the

establishment o a minimum living insurance program, or dibao. Borne o

an experiment in Shanghai in 1993, the program sets a minimum monthly

income based on the lowest level o local consumption and the local

governments nancial capability.Dibao is aimed at assisting laid o and

unemployed workers and retirees with no pensions in urban areas.

The government has made some progress in extending the program cover-

age in rural areas. However, because local governments largely shoulder

the programs unding, many poor regions in China have not been able to

implement it.


8/16


GettinG sMart aBout education

Reorming its social saety net also requires China to invest urther in

education and share the burden o paying or it with amilies. Even with

ewer children in each amily, education expenses still account or about

15% o average urban household spending, according to a recent survey.

The total government spending on education, however, is only about 3%

o GDP, which pales in comparison to about 6% in the U.S.

Increased spending on education by the government, and a corre-

sponding reduction o the cost burden on amilies, would likely help boost

public and private consumption. More importantly, better education will

enable the country to develop the necessary human capital to grow its

knowledge industries and stay competitive.

iMProvinG the Pension systeM

With an aging population and its one-child policy, Chinas pension

system has a signicant impact on private consumption. People over the

ocial retirement age60 or men and 55 or womenmay grow rom the

current 10% to one-third o the total population by 2050. Historically, the

deep-rooted amily culture in Asia meant that amilies were responsible or

0% 20% 40% 60% 80% 100%

India

Singapore

China

Vietnam

South Korea

Brazil

Australia

JapanCanada

US

UK

Germany

France

Government Social Insurance Commercial Insurance Patient

HEALTH CARE EXPENDITURE FUNDING SOURCES

who Pays for health care?

Asian countries have much higher rates o patient-paid health care than other countries, and lower rates o expenditure by government or

social insurance. South Korea appears to have the strongest saety net (comparatively) with about 50% o health care spending covered by

government or social insurance. In China, the rate is less than 40% and India less than 25%. (Source: Ministry o Health, China)


9/16

ASIA NOW | The Growth Issue

(continues on p. 10)

taking care o their elders. With industrialization, however, extended am-

ily ties are gradually weakening. It is also increasingly dicult or amilies

to help older generationsthe one-child policy means each child may be

solely responsible or caring or two aging parents and our grandparents.

In 1997, China began requiring compulsory retirement contributions rom

employees and employers. The government also set up a National Social Secu-

rity Fund to help protect against potential shortalls. While there has been prog-

ress in reorming the retirement system, many problems remain. Pension cover-

age in urban areas remains relatively low and in rural areas is largely absent.

Pension reforM as a driver of caPital Markets

As noted earlier, one reason so much Asian capital fowed into the U.S.

banking system (and contributed to the overheated credit markets) was that

Theres money to be made in education in Asia. Consider the online cram

school that helps students prepare or the Korean SAT. Korean amilies

spend as much as 14% o household income on education. A classroom-based

cram course or the college entrance exam can cost as much as around $150 per

course. One company, however, oers online access to lectures by top-notch

proessors at just about $60 per course. While reducing the cost burden on

students, the company also leverages the economies o scale o the internet to

reach hundreds o thousands o paying customers, so it can pay its teachers top

dollarin some cases, over $1 million. The online model is an example o a

way to reduce amilies education costs while reaching students more eciently

than is possible through classrooms. And, as a private sector initiative, the model

sidesteps government involvement while creating an investment opportunity.

Is ChinaFinallyReady toRelax itsCurrency?

koreasonlineeducationstars

Graduates Among Employed 25-34 Year Olds(per 100,000 population)

0

500

1,000

1,500

2,000

2,500

3,0003,500

4,000

OECD Avg1USJapanAustraliaFranceKorea

POST SECONDARY SCIENCE GRADUATES

1 Established in 1961, Organization or Economic

Co-operation and Development (OECD) brings together

the governments o 30 member countries committed to

democracy and the market economy to support

sustainable growth, boost living standards, among other

goals, around the world. (Source: OECD)


10/16


there were not enough places or it to be invested in Asia. A much deeper capi-

tal market in Asia should have the eect o directing more investment within

the region. Not only would that provide greater capital resources to support

sustainable economic growth, but it would also better balance the global

nancial markets and likely ease the regions dependence on the U.S. dollar.

In order to catch up with Western capital markets, however, China has

a lot o work to do, in particular strengthening the regulatory ramework

that enables capital markets to operate eciently. A shortage o proessional

expertise in the investment industry is also cited as a reason that China lags.

Reorming Chinas pension system would likely help broaden and

deepen domestic capital markets, driving money into the xed income

markets and nancial services industries, thereby providing the unding or

people to maintain their liestyles into old age.

strenGtheninG Bonds

Underdeveloped bond markets remain a crucial gap in Asias nancial

system. The size o the bond markets is dwared by the amount o outstanding

bank loans, and bond maturities are limitedthe majority o bonds tend to

mature in 3 to 5 years. The situation could change, however, i pension reorm

gains momentum. Pension unds need to invest in long-dated assets to match

their long-dated liabilities. Corporate bonds have the ability to meet the pension

unds duration requirement, and also oer higher returns over traditional low-

yielding instruments, such as government treasury bonds or bank deposits.

As Asian pension unds demand more long-dated corporate bonds, compa-

nies in Asia should be expected to increase the supply, taking advantage o this

avenue to raise capital or expansion. In doing so, companies diversiy their

unding sources and decrease their current overdependence on short-term

bank lending. Bond nancing would decrease risks at times o economic stress.

Well developed domestic bond markets will provide an alternative

nancing source to bank loans, allowing companies to tap into domestic

savings or nancing. As a result, the systemic risks associated with bank-

centric systems should be reduced and a more balanced, diversied nan-

cial system should be more resilient.

deMandinG More transParency

Another important role or pension unds is in improving market transpar-

ency and promoting long-term investing in Asia. A pension unds mandate

Reorming Chinas

pension system would

likely help broaden and

deepen domestic capital

markets, providing theunding or people to

maintain their liestyles

into old age.

(continued rom p. 9)

Generation GaPLaunched in 1979,

Chinas one-childpolicy means thatmany young adultsend up supportingboth parents andour grandparents.The policy is beingrelaxed.


11/16


to und long-term pension obligations requires it to invest with a long-term

horizon, rather than timing the market or trading on short-term volatility.

Long-term investing requires a transparent capital market, in which sucient

regulations and enorcement are in place to protect shareholders rom corpo-

rate misbehavior and market manipulation. This is an important issue in Asia.

Historically, the lack o transparency and sucient regulation has contributed

to the perception that the region was stuck in an emerging phase.

As pension unds grow, so will their clout with regulators and other

market participants or a better regulatory ramework. Improved regulation

and a more transparent market should, in turn, infuence the mentality o

millions o individual investors, ostering an appreciation or long-term

investing and creating a healthier, more sustainable capital market.

holdinG ManaGeMent accountaBle

Pension unds can have a similar infuence on corporate governance in Asia.

By acquiring large, long-term stakes in listed companies, pension und managers

can hold corporate management teams more accountable and protect minority

shareholders interests. As more pension unds across the region adopt activ-

ist investment styles, corporate management will be under greater pressure to

improve governance and enhance long-term shareholder return.

Pension reorm in Asia should work to support the investment and

Indonesia

Philippines

Thailand

Taiwan

Hong Kong

India

China

Malaysia

Singapore

South Korea

Japan

ASSETS UNDER MANAGEMENT BY COUNTRY (US$B)

Pension systeMs throuGhout asia

Japans Government Pension Investment Fund is the largest public pension und in the worldmore than ten times the size o Chinas

National Social Security Fund, which ultimately will have to support a much larger aging population. (Source: National Statistics as o 2007)


12/16

12 ASIA NOW | The Growth Issue

Korea has done more than most Asian countries to attempt to stimulate

the development o its corporate bond market. Ater the Asian nancial

crisis o 1997, and current economic crisis, the Korean government realized

the importance o a long-term nancing alternative to reduce the depen-

dence on banks. As a result o deliberate policies, the corporate bond market

in Korea has grown rom just $73 billion in 1997 to $120 billion today.

In the rst hal o 2009, hit by the global nancial crisis, Korean banks

had limited lending capacity as they sought to reduce risky assets. Meanwhile,

interest rates in Korea dropped to an all-time low. Many companies used the

opportunity to renance their short-term bank debt with longer-term bonds.

New issuance o corporate bonds rose 75% in the rst quarter o 2009.

Changing the composition o debt, with greater diversication between

short- and long-term bank and bond nancing, would be a signicant

development in Asia. Companies are better able to mitigate risk when

they can nance their long-term assets with long-term capital rather than

short-term bank loans. Korea has begun this evolution, but still has some

distance to go to lengthen bond maturities and urther reduce the

disparity between bank and bond nancing.

Is ChinaFinallyReady toRelax itsCurrency?

koreasevolvinGBondMarket

0

50

100

150

200

250

300

350

400

20082007200620052004

US$B

Total Public andTreasury Bonds

Total Corporate Bonds

PUBLIC VS. PRIVATE BONDS IN KOREA

consumption environment in several ways. It will help relieve the burden on

individuals to support their extended amilies using current income. It will

increase nancing options or companies. And, i it succeeds in improving

transparency, regulation and corporate governance throughout the region, it

should have the eect o increasing the value o public companies.

(Source: Bank o Korea)


13/16


Asian banks are not completely immune to the current global credit

crisis. Banks operating in open economies such as Japan, Singapore and

Hong Kong, as well as those with extensive international operations, de-

nitely elt the impact o excessive loan exposure. Largely unscathed, how-

ever, were the vast majority o domestically-oriented Asian banksthanks,

strangely enough, to their unsophisticated nancial aptitude and closed

capital accounts. To help Asian economies rebalance export-driven growth

with a greater reliance on domestic demand, banks have moved switly into

new and protable domestic oerings, notably consumer lending.

In China, the catalyst or growth in mortgage lending is the rapid devel-

opment o housing markets, accompanied by a gradual shit in consumer

attitudes toward borrowing. Until recently, Chinese homebuyers preerred

MOVE IN Pmm-p Gg-g p. Bmgg g

p cp gg gm .

AsianBanks:Agents o

GrowthWhile Asias international

banks have been battered

by the global credit crunch,

many banks have avoided

problems by ocusing on

domestic markets, playing

a key role in boosting

domestic consumption.


14/16


paying or a home purchase with cash by using savings or borrowing rom

amily and riends. Ater the recent rise in home prices, consumer mental-

ity has changed and homebuyers are more comortable taking on bank

mortgages without the stigma o being a borrower. Banks thereore serve a

pivotal role in improving the home ownership level in China.

In India, government constraints on banking are being relaxed gradu-

ally. Banks are still required to invest 25% o every rupee on deposit in

government bonds. And 36% o bank loans must go to agriculture and

other priority sectors, dened by the Reserve Bank o India as sectors

that would not have access to lending markets or could not aord to pay

commercial interest rates, such as small business, artisans and retail shops.

Increasingly, though, banks are shiting to the mainstream retail market,

providing consumer credit and ee-based wealth management services.

Asian banks have successully educated consumers and promoted loan

productswhile avoiding the sub-prime trap the Western banks ell into.

Mortgages, credit cards and auto loans are becoming increasingly popular

among the three billion Asian consumers who are encouraged by economic

progress and are working their way to the middle class. Easier access to credit

is an important stimulant to domestic consumption, on which Asias new

growth model is predicated.

Billions

Bank Writedowns

Capital Raised

0

200

400

600

800

US$1,000

AmericasEuropeJapanAsia ex-Japan

Bank writedowns vs. caPital raised

While the credit crisis caused U.S. banks to write down signifcantly more assets than capital raised, Asian banks managed to raise

more capital compared to writedowns. (Source: Bloomberg, as o 3/23/09)


15/16


The subject matter contained herein has been derived rom several sources believed to be

reliable and accurate at the time o compilation. Matthews International Capital Manage-ment, LLC does not accept any liability or losses either direct or consequential caused by

the use o this inormation.

You should carefully consider the investment objectives, risks, charges and expenses of the

Matthews Asia Funds before making an investment decision. A prospectus with this and

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asianow is a series o Special Reports

produced or shareholders o theMatthews Asia Funds.

To receive uture issues, please sign up

online at www.matthewsasia.com or

call 800-789-ASIA [2742]

a new GloBal econoMic order

By reducing their dependence on exports, boosting their citizens

buying power and improving domestic investment opportunities, Asian

countries are poised to assume a greaterand arguably rightulrole in the

global economy. Asia will always have its export hubs, such as Hong Kong

and Singapore. But the largest countries, China and India, have vast inte-

rior areas that are largely unaected by the export economy, where some o

the greatest growth is occurringsigns that a new growth model based on

domestic commerce and consumption is starting to take shape.

From an investment perspective, the key will be identiying companies

and sectors that stand to benet rom this transition. Developing capital

markets should also benet investors and companies alikeallowing com-

panies greater access to capital while improving investor condence.

By dampening growth in the West and compelling Asian countries to

look inward or growth, the recent global economic upheaval may well

prove to be the catalyst that accelerates the transition to a new global

economic order. For the investment community, it is critical to understand

that the rules that governed East-West economic relationships or the last

hal century are being rewritten. Whatever shape Asias new growth model

takes, it may look little like it did in the past.


16/16

The Changing Patternso Global Growthcomposition of growth (as measured in estimated gdp)

(Source: IMF)

NEXT 5 YEARSPAST 20 YEARS

EuropeEurope

Restof Asia

Restof Asia

IndiaIndia

China China

NorthAmerica

NorthAmerica

OtherAfrica

Southmerica

OtherAfrica

SouthAmerica

Where will the greatest contributions to global GDP growth come rom in the next ve

years? According to projections by the International Monetary Fund, China is expected

to become the largest single contributor to global growth (at 32%), while China, India and the rest

o Asia combined will account or more than 50% o the worlds collective economic growth. This is

in sharp contrast to the 20 years leading up to 2008, when the U.S. and Europe together accounted

or nearly hal the worlds growth. I China becomes the most powerul growth engine on the

planet, we can expect it to assume a more commanding presence in the global economy.

asia growth

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