Cablegate: Singapore-Based Experts Weigh in On the Asian

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

1. (SBU) Summary: Southeast Asia is better positioned than
in recent memory to face the challenges presented by a
slowdown in the global economy, especially in China,
according to several Singapore-based economists and financial
analysts. These economies inevitably will feel the pain of a
downturn, especially a slump in electronics exports, but
ongoing restructuring and outsourcing, particularly in
Indonesia, Malaysia, Thailand, will help mitigate the risks
involved. All of the analysts were skeptical about the
sustainability of China's high growth, but differed on how
serious its economic problems were. The most pessimistic
argued that China's "hard landing," caused by over-investment
and the bursting of several sectoral bubbles, would result in
no more than 3 to 5 percent GDP growth in 2005. Southeast
Asia's substantial foreign exchange reserves would help
cushion the impact of China's economic woes. A hard landing
might actually benefit Southeast Asia, one analyst argued, as
global investors shifted their focus back to the region as a
place better equipped to absorb investment. That said,
Southeast Asian economies, largely restructured since the
1997 financial crisis, remain vulnerable to the risks of
overexposure to China. Of particular concern is that China
continues to follow the more volatile pre-1997 growth model
discarded by its neighbors. One analyst warned that faced
with a severe slowdown, China might no longer behave as
"graciously" with its neighbors as it is now when its economy
is still in an upturn. End summary.

2. (U) Post took advantage of recent visits by a number of
INR analysts to organize a conference entitled, "The Asian
Economy: Internal Changes, External Challenges." The
all-day conference brought together a number of
Singapore-based Asia-watchers who spoke on topics ranging
from how global trends are affecting Asia to the impact of
Asian economic trends on the global economy and, in
particular, China's role in the region.

The Global Economic Slowdown: Not all News is Bad for Asia
--------------------------------------------- -------------

3. (U) Asia's trading nations face new challenges due to a
convergence and tightening of a number of variables that
underpin the global economy. Manu Bhaskaran (Head of
Economic Research for Centennial Group Holdings) singled out
a number of cyclical demand drivers at play in this scenario:
weakening demand among the OECD and China; a rise in global
interest rates; a tightening fiscal policy in the U.S.; a
sharp decline in global excess liquidity since 2000; an end
to the housing boom in many economies; and rising oil prices.
Not surprisingly, Bhaskaran explained, most major economies
were forecasting slower growth for 2005. For Asian countries
in particular, Bhaskaran predicted an increase in the
frequency of economic shocks related to electronics exports
resulting from the industry's shorter cycles, price
volatility and slumping global demand.

4. (U) Not all the news is bad, however, Bhaskaran said.
Structural positives also exist, most visibly in terms of
global competitive pressures that require companies to
restructure in order to increase returns. Outsourcing, he
argued, was still at an early stage, with far more relocation
of production to come. Regionally, he cited the reemergence,
or "returning to normal," of Southeast Asia -- particularly
Indonesia, Malaysia and Thailand -- where economies have
begun to grow again. This has triggered a new investment
cycle, particularly in infrastructure. India's growing
competitiveness in manufacturing was also an encouraging
development in terms of this overall restructuring process,
Bhaskaran said.

Shifting Trade, Investment and Consumer Debt Patterns
--------------------------------------------- --------

5. (SBU) China's rise as an economic powerhouse has changed
the nature of Asia's economies. Acknowledging that the
movement of trade surpluses (with the U.S. and the EU) from
the rest of Asia to China is an old story, beginning in Hong
Kong as early as 1993, Clifford Tan (Director, Asia-Pacific
Economic and Market Analysis, Citigroup) noted that this
trend was having a significant impact on the region; all the
major Asian economies were now running surpluses with China,
the direct result of supplying the raw materials and
semi-finished inputs that China's industries require. Tan
cited Japan, South Korea and Taiwan for having leveraged the
China platform most effectively to advance their own growth.
Japan, he said, was particularly successful, with Japanese
companies achieving the world's highest rates of returns on
their Chinese investments. The resulting increase in cash
flows were in turn fueling increased capital expenditures in
Japan and further Japanese investments in the region.

6. (SBU) With the Asian Financial Crisis and its related sea
of bad debts a thing of the past, cash was again flowing into
Southeast Asia, observed Tan. With so much attention focused
on China, however, the resulting slack in corporate demand
for domestic and intra-regional investment was being picked
up by rising consumer demand instead. This phenomenon, Tan
said, was amplified by a "dearth of ideas in corporate Asia"
about what to do with all the liquidity (except to reinvest
it in China). Manu Bhaskaran similarly noted the trend
towards increasing consumer debt in Southeast Asia. He saw
this development as a double-edged sword, reflecting a degree
of resiliency in these economies, but also the potential for
a consumer debt crisis if the borrowing binge continued
unabated, much as what happened in South Korea.

China's Economy: Careful With That Landing

7. (SBU) All of the conference's speakers were skeptical
about the sustainability of China's high growth, but differed
on how serious China's economic problems were. Manu
Bhasakaran questioned how China, with its "hubris-generated"
growth, could avoid a hard landing (which he defined as a
drop to 4-5 percent GDP growth). It was too late for China's
leaders to orchestrate a soft landing, he explained: "Bad
lending has financed bad investment." China's primarily
supply-sided growth had fueled a number of sectoral bubbles
that continued to feed off further excessive lending. In the
absence of sufficient data, Bhaskaran observed, it was
difficult to predict when China's economy would slow, or how
Chinese leaders would respond to inevitable social

8. (SBU) PK Basu (Managing Director, Robust Economic
Analysis) lambasted China's "horrible" growth model. With
asset growth exceeding 20 percent the past two years and
non-performing loans (NPL) equivalent to 40 to 50 percent of
GDP, Basu claimed that these levels far exceeded anything
reached in Southeast Asia in the run-up to the 1997 financial
crisis or in Japan. The Chinese leadership's focus on the
NPL problem offered a glimmer of hope, Basu contended, but
the overall momentum and pervasiveness of NPLs in the economy
would nonetheless be extremely difficult to slow down without
harsh administrative measures. The most bearish of the
speakers, Basu forecasted a hard landing for China in 2005,
with GDP growth of only 3 to 4 percent (note: other speakers
argued that China's economy was still performing well enough
to achieve growth rates between 7 and 9 percent.) Southeast
Asia would not escape unscathed, Basu said, but healthy
foreign exchange reserves would help cushion the blow (as
they would in China). Additionally, Southeast Asia stood to
benefit from China's hard landing as global investors shifted
their focus back to the region as a place better equipped to
absorb investment.

9. (SBU) Clifford Tan said he was "very concerned" about the
China growth model and that much of the economic "street"
research on China was "doggedly compromised," leaving
important questions unanswered. The situation was
exacerbated, he explained, by the many international
investment banks jockeying for China's IPO business and
restrained in their criticism of Beijing. Most Southeast
Asian countries were forced to scramble for a new growth
paradigm in the wake of the 1997 financial crisis, having
been jolted into the realization that the old growth model
was too risky in the long run, Tan explained. China, on the
other hand, continues to the adhere to this old model,
grabbing growth-related low hanging fruits where it can.
Whereas Southeast Asia was allowed to continue along this
path for more than two decades, Tan admonished that the
financial markets, having been burned so severely before,
would not be so forgiving this time with China, perhaps
giving China the "thumbs down" within another 5 years or
less. Tan said that Southeast Asia would feel considerable
pain during this process given its increasing dependence on
the Chinese economy as a driver for its own growth.

10. (SBU) Van Anantha-Nageswaran (President, Libran Fund)
worried that strong China-led export growth in Southeast Asia
was postponing needed economic reforms. Yit Fan Wong
(Managing Director, Country Risk Management, DBS Bank) argued
that the impetus for economic reform in Southeast Asia --
company delistings, consolidations, better accounting,
political reforms -- was not so much dampened by "China
exhuberance" factors, as driven by the earlier experiences of
the 1997 financial crisis. The problem with absorbing excess
cash flow, Wong said, was that Southeast Asian companies were
still overly cautious, reluctant to borrow and more focused
on cutting costs and increasing productivity. Set against
this backdrop, Wong explained, China had been very careless
about its investment returns and its costs were rising. With
a 1997-style crisis looming in China, Southeast Asian
countries might reverse direction and begin moving away from
closer proximity to China's economic orbit over the next
three to five years. Under this scenario, Wong advised,
China might no longer behave as "graciously" with its
neighbors as it is now when its economy is still in an
upturn. This could translate into very different economic
and political relations with other countries in the region.

© Scoop Media

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