Quick hits and pink picks: Asia edition

-According to newly released figures, China's foreign reserves plunged a record $32.6bn in January, and a further $1.4bn in February. This is partly attributed to heavy selling of US T-bills and other foreign bonds, capital flight and falling export revenue. Before we get too worried about a loss of Chinese confidence in the dollar, or too excited about the unwinding of macroeconomic imbalances, these same reserves bounced back to the tune of $41.7bn in March.

-China has turned it's increasingly assertive foreign policy to South-East Asia this week with the announcement of a $10bn investment fund for Asean countries. It will also provide $15bn in credit over the next three to five years.

-Thailand's state of emergency is weighing heavily on the baht, while ratings agencies have warned of downgrades to the country's credit rating.

-The UN Security Council has agreed on a statement condemning North Korea's missile launch and calling for the tightening of existing sanctions.

That Was The Week That Was

Politique
-Japanese Prime Minister Taro Aso announced a new, Y15,400bn fiscal stimulus package.

-All criminal charges against Jacob Zuma are dropped, clearing the way for the ANC head's election to the presidency later this month.

-An East Asia summit is cancelled as Thailand stands on the brink of "revolution." Elsewhere, tens of thousands of protesters rallied in the Georgian capital of Tbilisi for Saakashvili's resignation.

-An earthquake killed at least 250 people in Italy, leaving near 20,000 others homeless.

Economia
-Wells Fargo stunned Wall Street with a profitable Q1 2009, contributing to the fifth straight weekly gains for US stocks.

-The FT ran an interesting article on Japanese bank Nomura's move towards more "western-style" contracts for employees.

-Underlining the collapse of trade in Asia, Singapore's GDP "probably" shrank for the fourth straight quarter, the deepest recession in the country's history.

The Rest
-In Europe, Barca looked unbeatable in their thrashing of Bayern Munich, a sublime Adebayor goal put Arsenal in the driver's seat and Chealsea stunned Liverpool at Anfield.

-A Reuters piece asks, "Is America's love affair with the 'exurbs' over?"

-Art prices fell 35% in Q1 2009.

East Asia's role in the emerging post-crisis governance paradigm

In a piece on Vox EU, Hadi Soesastro argues that East Asian countries should seize the opportunity afforded by the G20 and integrate their strategic interests and influence into the emerging post-crisis governance paradigm.

The crisis has created an opportunity for new players to bring their plights, interests, and aspirations to bear towards more inclusive global efforts to resolve it.

He argues that East Asia's inward focus over the past decade (with the big exception of China) has limited the region's collective influence and ability to project its strategic interests onto the global economic governance structure. Soesastro points specifically to the creation of a regional monetary fund, borne out of the collective sense of injustice at the hands of the IMF following the East Asian financial crisis.

He also believes, more broadly, that the focus should not be on the reform of existing international institutions. Global governance would instead be more effective if based on regional arrangements that coalesce the interests of developed, emerging and least developed economies within a geographic area. He points to efforts already underway within Latin America and the CIS to develop regional agendas for the G20 forum.

Finally, he identifies the G20 as a vehicle for China to increase its participation in global economic governance:

East Asia’s strategic participation in the G20 provides a framework for China to play an increased role – as a key member of the regional community – in the recovery of the global economy and in shaping global economic governance. In the Chinese language, the word “crisis” is made up aptly of the characters for “danger” and “opportunity”.

Soesastro's rallying cry for East Asia reflects a growing consensus that the G8 has become irrelevant and the post-crisis economic governance paradigm must be inclusive of a broader range of stakeholders, particularly those whose economic power far outweighs their political representation under the current global regime. If macroeconomic imbalances have played a central role in the crisis, the representatives of one half of that equation (i.e. Asian savings, which I know is a horrible oversimplification) should undoubtedly play as large a role in resolving the crisis as any party from the other side of the ledger. Further, trade is vital to East Asian economic growth and integration. Having a vocal advocate for open trade at the negotiating table, at a time when many of the major western countries are swinging towards protectionism, is of paramount importance to preserving the free trade consensus.

While I am skeptical of the ease with which Soesastro envisions a regional convergence of interests on issues like trade and investment (will China's interests always converge so neatly with Japan's?), he nonetheless highlights the enormous opportunity previously marginalized countries are provided by the crisis. Regions like East Asia can exert their collective influence to refashion global economic governance more in line with their own strategic interests. They can also play a vital role in preserving the open flow of trade and capital that has been so vital their own development.

GUEST POST - A year in power for the Korean President: a question mark over the 'Asian miracle’

From our correspondent in South Korea, Louisa Metcalfe:

Seoul - I sit reading about “dark clouds” moving over the Korean economy. Of course, the problem is common to all of the global economy, but a phenomenon which has been specific to Korea since the Lehman Brothers collapse of September last year. The continuing slide of the Korean economy begs the question: how will Asia, the apparent new beacon in the global economy, lead the world economy out of recession? Moreover, will the progress be facilitated by further cooperation as witnessed at the end of last year?

This is a question which is in part related to the recent news that a Tripartite Agreement has been formed between Japanese, Chinese and Korean leaders. Korean President Lee Myung-Bak, Japanese prime minister, Taro Aso, and Chinese Premier Wen Jiabao, pledged “Tripartite cooperation” at Fukoka, Japan, on December 13th 2008. This agreement comes as somewhat of a breakthrough in Asia, after decades of mistrust and resentment toward the acts Japan committed during World War II, and before. Therefore, the subject of cooperation here in Korea seems to have witnessed symbolic progress - something which appears to be a result of the global economic downturn itself.

The relevance of this news resonates now as this week in Korea marks a year in power for the president Lee Myung-Bak. Yet despite talks of the Asian miracle of late, and hopes of economic success via cooperation in December, the ratings of the Korean president have been halved in the past year. This is arguably largely a result of the extent of the damage which has occurred in the Korean economy during this time. The past year has seen a vast decline in exports and capital reserves as the USA has become less able to consume Asian goods. Two of the traits which lead to nations such as Korea being held up as examples of the ‘Asian Miracles’.

So what now? Will the Asian miracle last? I see that this question may be subject to cooperation. Can and will the ‘Asian Miracle’ persist without external facilitation? For me, the answer is yes. The situation looks optimistic for the next year in power of Lee MyunBak. The Korean media is projecting that the president has finally accepted that the crisis means harder action must be taken, and his mantra has become, ‘Crisis equals Opportunity’. Moreover, the two words have the same meaning in Japanese, portraying an image that the national differences between the two countries will soon be offset, at least temporarily, in order to resuscitate the Asian economies.

The Tripartite Agreement promises to boost the Asian Development Bank, and supersede the "Chiang Mai initiative", created during the East Asian Financial Crisis, to allow bilateral swaps. Furthermore, the Association of South East Asian Nations (ASEAN) has been further developed in recent years (for example, including China into ASEAN+3). The recent news of cooperation and change in Korea therefore comes as a refreshing change to the news of gloom and doom, with Korea, Japan and China comprising a quarter of the world’s population, and a fifth of the world’s economy. Thus portraying the potential for these countries, including Korea, to chase away the dark clouds over their economies over the coming year.

---------------------------
Interested in being a guest correspondent? Fire us an email: ipejournal at gmail.com.

The Asians Are Drinking All The Scotch!

We have spent a considerable amount time on this blog defending the merits of globalization in general and free trade in particular. One of the key selling points of opening up trade relations is that consumers get access to more variety and cheaper products. You would need only to compare the variety of cuisine offered in major cities like London, Beijing and Tokyo to what it was 30 years ago for a vivid illustration of this change.

Globalization has also produced some interesting effects on markets for alcoholic beverages. For instance, I enjoy quizzing Guinness drinkers on which country consumes the most of Ireland's famous black liquor. They are usually surprised to learn that Nigeria has taken over the largest share of the Guinness market, with more sales than either Ireland or the UK. In fact, a reliable source suggests that Africa accounts for 40% of Guinness' brew and sales.

So globalized markets are great for beer connoisseurs in Africa. However, I'm sorry to say that there are limits to the globalization of alcoholic beverages, and we've reached them. The line has been crossed. If this trend is not corrected, then I'm leaving the globalization fan club. I'll be handing in my members mug and hoisting a poorly-designed placard, donning my gas mask and joining an anti-globalization rally somewhere. Because, you see, this morning I learned that the Asians are drinking all the scotch.

I was in the liquor store inquiring about why a certain bottle of single malt was no longer being carried, and was it possible for it to be ordered. Following a Q & A, I learned that, despite being one of the largest purchasers of alcoholic beverages in the world, my government-monopoly-owned liquor store is losing its market share of single malt scotch to Asia. Not only has the selection declined, but the prices of the remaining scotches is going up. Indeed, I have watched in horror as the price of one particular bottle - Lagavulin - has increased 25% over the past 6 months. The same trend repeats itself across the shelf, although in varying degrees.

There are some basic economic factors at play here. First, demand in Asia is waaaay up. So much so that suppliers are having a difficult time keeping up with their orders. The high-growth markets are the BRIC countries (Brazil, Russia, India, China) as well as Singapore, South Korea and other smaller markets. Furthermore, I was told by the manager of the aforementioned liquor store that the profit margins are higher in East Asia when compared to the more mature markets of North America - this, despite the fact that they need to ship the booze further and that Asian consumers are less-wealthy, as a group. I wonder if the lack of competition helps as well: in North America, (Scottish) scotch has to compete with Irish whiskey, Canadian whiskey, bourbon and similar products. I doubt the same is true of South Korea.

Thus, by harnessing some of the benefits of globalization, major emerging markets have grown wealthy and have begun importing products on which to spend that wealth. The effect, perversely, is that the globalization of markets has actually made products in my part of the world both less available and more expensive.

A few more points are worth pondering:

- First, is this trend going to repeat itself with other luxury goods like Persian rugs, French wine and German cars?

- Second, given the way things are going lately, this trend makes distilling scotch one of the few areas of UK business where things are looking good (that, and bankruptcy law). In fact, several new distilleries have been built to deal with the surge in demand. Will these new distilleries be able to ride the wave long enough to compete with more established brands? The Asian Generation of single malts, perhaps.

- A final, and related, point is that Asia is set to be very hard hit by the fallout from the current financial turmoil. Will that curb their enthusiasm for delicious scotch? It's reasonable to suspect that it will, but only temporarily. As Frank the Tank put it so eloquently: "Once it touches your lips..."

Monday Morning Round-Up: UK Frozen Assets & more

- Oh how I wish I wish this had happened while I was living in London: the heaviest snowfall in almost two decades has hit the UK capital. I've always wondered how the City workers would react to snowfall and now we've found out: they take a "snow day" - to the cost of about 1 billion pounds. (Here's a slideshow, and more funny)

- Anti-protectionist writing continues to pour out of the economic blogosphere. You can find a writer at Free Exchange dismantling the populist argument here; the Davos crowd is understandably nervous, and Willem Buiter is his usual, uncompromising self. A sample:

If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it. The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House.

- China's manufacturing sector contracted for the sixth consecutive month in January. But in fact the trend is much wider than that, and much worse. Cue the trade war.

From The Alan Greenspan Dept. of 20-20 Hindsight

With only a couple of weeks left in office, Hank Paulson has been busy holding interviews to make his views on the financial crisis clear. Here he is explaining how the Treasury lacks sufficient authority to deal with financial crises. Here he is again two days later explaining how macroeconomic imbalances are the true, underlying cause of our recent financial mess. (For a basic run down on the imbalances issue, see my previous essay).

Now, Hank Paulson is absolutely correct in pointing to the imbalances as a source of cheap credit that led to excessive risk-taking. But as my co-author rightly pointed out, it is almost as if Paulson is blaming a concept for the crisis, not unlike those who blame "globalization" for all the world's ills:

"Aha!," say the Americans, "it was those pesky imbalances that made us run huge national deficits and unsustainable personal debt." "It's not our fault either!," retort the Chinese, "those imbalances forced us to manipulate our currency in order to sustain a massive trade surplus." "Don't look at me!," says the investment banker, between Manhattans. "What did you expect me to do with all that cheap credit? Monitor who was holding all that risk?" "Why are we burning through cash at a rate of billions per month after operating for three decades with an unsustainable business model?" asks GM's CEO on conference call from his private jet, "Why, it was the, er... macrosomething imbalances!"

You get the idea. The reality is that the economic imbalances are the culmination of the decisions of governments and individuals over an extended period of time that were self-interested and ignored the bigger picture. The imbalances equation has a savings glut and investment drought on one side, and a collection of irresponsible financial incentives on the other. Ultimately, this situation has been brought on by the unwillingness of the world's major financial actors to take responsibility for the long run implications of their actions. A quote from The Economist:

"A sound international economic order cannot be built on the assumption that the rumbustiously richest country will go on borrowing unprecedented amounts at enormous interest rates from everybody else for ever.”

And yet that's pretty much the model we've been working from (except with low, instead of high interest rates). Oh, and where did I take that quote from? The Economist's 1984 endorsement of Ronald Reagan for president. Twenty. Four. Years. Ago. These imbalances did not creep up on us, folks. We need coordinated action by the G20 economies to address the problem without resorting to protectionist measures. It's too bad we needed a recession to drive this point home to the Secretary of the Treasury, but there you have it.

Economic Crisis Felt in East Asia

A Dec 10 report by the World Bank forecasts that real GDP growth in East Asian developing countries will fall by 1.8% from 2008 to 2009, to a rate of 6.7%. When including developed countries, the rates drop by 1.7% to 5.3% over the same period.

This is not too surprising since, as discussed below, the heavily export-oriented economies in the region are seeing the effects of declining demand impact their balance sheets. I wonder, too, about the rapid increase in the relative value of the USD over recent months. Many countries in the region fix their currencies (in varying degrees) to the greenback as a hedge against fluxuations in exchange rates - a resurgent USD means their exports are going to be more expensive just as demand is declining.

The good news from the WB: countries in East Asia are much better prepared for today's turmoil than they were a decade ago. In particular, "the countries which have entered this crisis with low debt burdens, surpluses in their fiscal and external current accounts and large external reserves will have the most room to maneuver as the crisis unfolds."

Sounds like pretty standard WB-fare to me. Part of the point of building up those large external reserves in the first place was to prepare for just such an occassion. I just hope it pays off and the analysts are "more right" than they have been in the past.