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DSGAsiaIndependent Asian Economic & Political Analysis
DSGAsiaPost Crisis Financial Regulation and
Macro Stability in Asia
Simon OgusSingapore Economic Policy Forum
22nd October, [email protected]; www.dsgasia.com
2 DSGAsiaIndependent Asian Economic & Political Analysis
Deleveraging in the West is a multi-year process and there is scant evidence as yet of credit multipliers re-starting. A square-root “recovery” seems likely
The Square-Root “Recovery”
-2%
0%
2%
4%
6%
8%
10%
12%
14%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Global Nominal Money and Credit Growth% YoY 3MMA
Private Domestic Non-Financial Credit
Broad Money
Global includes US, Euroland, UK & Japan
3 DSGAsiaIndependent Asian Economic & Political Analysis
Rebalancing has been only partial. Current account dispersion remains historically wide in the context of a deleveraging (?) world
0%
1%
2%
3%
4%
5%
6%
0%
1%
2%
3%
4%
5%
6%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F
% GDP
Source Data: IMF
Non-Intervention
Capital
* Sum of the absolute size of global current account balances
Intervention Capital = Change in Global FX Reserves
Global Capital Flow Requirement *
Global Cross Border Capital Requirement as a % of Global GDP
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F
Current Account Balances as a % of GDPUSA Eurozone ex Germany
Germany Japan
China Asia ex Japan & China
4 DSGAsiaIndependent Asian Economic & Political Analysis
This is partly thanks to unreconstructed mercantilism. The dollar is cheap against the majors and in line with Asia, but the real divergences remain within continents
40
60
80
100
120
140
160
180
40
60
80
100
120
140
160
180
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
January 1990 = 100
JapanNon-Germany
Euro Area
Korea
Germany
40
60
80
100
120
140
160
180
40
60
80
100
120
140
160
180
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
January 1990 = 100
Japan
Euro Area
USA
China
Asia ex China ex JapanUSA, Japan and Euroland IMF Calculations;
Asia* and China DSGAsia Calculations* ULC-based where available, WPI-based otherwise
5 DSGAsiaIndependent Asian Economic & Political Analysis
Japan is the champion government debtor but a unique ownership pattern suggests that Europe is the likelier catalyst for bond market mayhem
Central Bank7.9%
General Government11.3%
Postal Savings20.8%
Public Life Insurance9.8%
Public Pension Funds and CMTs
10.6%
Public Financial Institutions
0.3%
Private Sector39.3%
Sectoral Holdings of Central Governement Debt (Jun 2010)
Source: Japanese Government Flow of Funds DataSource: Japanese Government Flow of Funds DataSource: Japanese Government Flow of Funds Data
(of which Foreign holdings 6.1%)
Sectoral Holdings of Central Government Debt (June 2010)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
220%
240%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Government Debt as a Percentage of GDP
Asia ex-Japan* Asia ex-Japan, China & India*USA** EurolandUK Japan (RHS)
* Excluding central bank paper** USA 2008 84% of GDP if State and GSE debt is Forecasts from the IMF
A 2009 Rogoff-Reinhart study notes that if public debt exceeds 90%, median growth rates fall by 1% and average growth rates by more
6 DSGAsiaIndependent Asian Economic & Political Analysis
Where was the decoupling? An early 1990s earnings trajectory seems likely though this may not preclude market re-ratings at times of global calm
-18%
-15%
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
-30%
-20%
-10%
0%
10%
20%
30%
40%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Asia Exports and OECD Industrial Production
Asia Ex-Japan Exports (LHS)
OECD Industrial
Production (RHS)
USD %YoY, 3MMA %YoY, 3MMA
Asia Ex-Japan Exports Volumes (LHS)
30
35
40
45
50
55
60
65
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Asia ex-Japan Exports (LHS)
US ISM Manufacturing
PMI (RHS)
Exports USD %YoY, 3MMA, EPS market cap/MSCI weighted %YoY Index 3MMA
Asia ex-Japan EPS Growth (LHS)
Asia ex Japan Exports & EPS Growth and the US ISM Manufacturing PMI
7 DSGAsiaIndependent Asian Economic & Political Analysis
Year-on-year export comparisons are easy but volume levels will tell us whether sustainable final demand is really returning
60
90
120
150
180
210
240
270
300
60
90
120
150
180
210
240
270
300
04 05 06 07 08 09 10
Export VolumesJapan KoreaTaiwan China
Index 2004=100, 3MMA20
40
60
80
100
120
140
160
180
20
40
60
80
100
120
140
160
180
04 05 06 07 08 09 10
Export Volumes
Hong Kong (Domestic) Singapore (Non-Oil Domestic)Malaysia Thailand
Index 2004 = 100,
8 DSGAsiaIndependent Asian Economic & Political Analysis
Real interest rates have been structurally declining and in China’s case especially, are well below the real expected return on capital
-21%
-18%
-15%
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
-21%
-18%
-15%
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
China Real Interest Rates
Mortgage Rate Corporate Rate
3-Month Deposit Rate
%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Asia ex-Japan, China & India Real Interest Rates
Mortgage Rate
Corporate Rate
3-Month Deposit Rate
%
9 DSGAsiaIndependent Asian Economic & Political Analysis
This all suggests that Asian property can still get a whole lot more bubbly
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Ratio of House Prices to Household Disposable Income
Japan
USA
UK
Australia
1
3
5
7
9
11
13
1
3
5
7
9
11
13
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Ratio of House Prices to Household Disposable Income
Korea
Taiwan
Singapore (HDB)Hong Kong
(Mass)
China (35 Major Cities)
India (Mumbai -HDFC estimates)
10DSGAsiaIndependent Asian Economic & Political Analysis
NPLs will eventually rise across the region but this should not for the most part hinder the ability of banking systems to lend. Multipliers work out here
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China
Asia ex Japan (Average)
Korea
Asia ex Japan (GDP Weighted)
Australia
Loan Deposit Ratios Adjusted for Reserve and Statutory Liquidity Requirements
-30%
0%
30%
60%
90%
120%
150%
180%
210%
240%
270%
-30%
0%
30%
60%
90%
120%
150%
180%
210%
240%
270%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Japan Asia ex-Japan
Asia ex-Japan, China & India ASEAN-4
Net Non-Perfoming Loans as a Percentage of Total Bank Capital
11
Conclusions Real interest rates in the developed world are both too low and too high at the
same time. Too high to allow deleveraging economies to fully recover, yet too low to encourage capital to exit and/or transfer from weak to strong hands
In Asia, real interest rates are unequivocally too low and way below expected rates of return on capital. Healthy financial systems are intermediating credit to generally underleveraged consumers and corporates. Bubbles threaten
Interest rate normalisation is being constrained by atavistic exchange rate targeting tendencies and a valid fear of excessive capital inflows. Trade wars and capital controls loom
Nevertheless, with external demand likely to remain relatively constrained, such Mercantilist tendencies need to be junked once and for all. Exchange rate manipulation is a hard habit to break for all too many though….
China is more able to achieve the holy trinity than most and thus it can perhaps afford to believe that the RMB is everyone else’s problem. In the words of Spiderman, “with great power comes great responsibility”
DSGAsiaIndependent Asian Economic & Political Analysis