20 October 2018
Emerging markets have wrongly allotted investments to non-productive sectors like property, leading to lower and lower productivity. Photo: CNSA
Emerging markets have wrongly allotted investments to non-productive sectors like property, leading to lower and lower productivity. Photo: CNSA

Time for Asian economies to deleverage

Global central banks are arriving at a crossroads by the end of the year.

I recently had a discussion with Stefan Hofrichter, my company’s chief of global economy and strategy department.

He said that after the 2008 financial crisis, major central banks adopted a super-loose monetary policy. Money supply by the four major central banks in the United States, European Union, United Kingdom and Japan is estimated to rise to 14 percent of world’s gross domestic product by 2016 from 5 percent before 2008.

Meanwhile, interest rates in developed economies are around zero, leading to a more severe imbalance in global economy and creating large amounts of bonds.

How will this influence the global economy, investment, consumption and saving activities?

Asian countries have learned their lesson from the 1998 Asian financial storm: their current account balance has turned to surplus from deficit. But developed economies like the G7 countries became net import countries with deficits in their current accounts.

Until 2007, the emerging markets and the developed ones are at two extremes — the former own huge current account surpluses and the latter known for excessive consumption, especially in the real estate sector.

The loose monetary policies in Europe and the US supported the growth of the real estate market, reduced financing costs and boosted consumption, while leading to capital inflows to the emerging markets, pushing up their export, investment and economic data.

The 2008 financial crisis reversed the situation and the gap between developed and emerging markets in terms of current account balance started narrowing.

In terms of global trade, however, the imbalance continues. Presently, about one-fourth of the world’s GDP is allotted for investments, marking the highest level in 25 years.

In developed countries, the zero interest environment failed to generate an expansion of corporates’ investment, but in emerging markets, due to large capital inflow, investment has recorded a notable increase — fixed asset investment is at about 30 percent of GDP, a historical high.

Despite increasing investment activities, global productivity hasn’t seem any large improvement. Data shows that the increase in global productivity was down to zero, if not negative, from a 1.25 percent level.

This means developed countries should have invested more, while the emerging markets have wrongly allotted investments to non-productive sectors like property, leading to lower and lower productivity.

More investment activities lead to higher debt levels. Data from the eight major developed economies and 12 emerging markets, which account for three-fourths of world GDP, shows that the non-financial debt level is at a record high level of about 230 percent of the GDP.

The ratio is still climbing, thanks to the emerging markets. The debt level of emerging markets rose 50 percent after the 2008 financial crisis, although their GDP data remained disappointing.

In many developed economies — Spain, Ireland, Portugal, the UK and, to some extent, the Netherlands and the US — credit spreads are below the historical average levels.

Thus, the credit cycle will start to rebound in the future. In fact, the US personal loan market started to pick up in 2012, and similar signs are emerging in the EU and UK.

I think it’s a natural progress to see economic recovery in the above mentioned economies. Although the US and UK will like to normalize their interest rates, investors should keep in mind the euro zone and Japan are still in quantitative easing mode.

The story in emerging markets is different. In China, Brazil, Russia, Turkey, Malaysia, Thailand, etc., and developed economies in the region like Hong Kong, Singapore and Australia, have recorded large increases in debt levels in the past few years, resulting in heating property markets with bubble risks.

Luckily, most Asian countries have more flexible exchange policies now. That should benefit economic adjustment. In addition, some also have large current account surpluses and strong fiscal power.

It’s a fact that capital is leaving the emerging markets. Our estimation is that by the end of June, about US$400 billion left China, while the outflow from emerging economies, including Hong Kong and Singapore, was about US$300 billion.

The continuing outflow puts deflation pressure on Asian economies, while credit expansion slows. Maybe it is time to deleverage.

This article appeared in the Hong Kong Economic Journal on Dec. 14.

Translation by Myssie You

[Chinese version中文版]

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Chief Investment Officer at Allianz Global Investors, Asia Pacific

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