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Review of 2010: Emerging markets

Emerging markets | Review of 2010: Emerging markets Ian Fraser and Anthony Harrington

By the middle of 2010 China overtook Japan as the world’s second largest economy. At the time QFINANCE cited a January 2005 report by Robert Scott from the US Policy Institute which pointed out that even at that stage China was taking significant market share in high value add industries such as automobile component manufacture and aerospace. Much of China’s advance is being driven by foreign enterprises and outside capital, all looking to capitalise on China’s huge investment in enlarging the pool of its engineering and science graduates.

There was much speculation that passing Japan gave a real inevitability to the idea that China would take over the mantle as the world’s biggest economy from the US within a few decades. It would happen somewhere between 2025 to 2050, the pundits predicted. Clearly, however, if the Chinese economy suffers a major crash over the next few years, then all bets are off.

According to recent reports from the World Bank and one of Asia’s leading independent brokerages, CSLA, featured in a recent QFINANCE blog on China, actual GDP growth for the third quarter of 2010 was 9.6% year on year. This was down a full percentage point from the half year figure of 10.6%, but still represented phenomenal growth. Moreover, by the end of 2010, China’s export machine had begun to visibly benefit from the pickup in global demand, generating a substantial trade surplus once again. The World Bank expects China’s 2010 GDP growth to even out at around 10%, with some falling away to around 8.7% in 2011.

The CSLA report reckons that 2010 will be the end of China’s loose fiscal policy stance as the Government moves to head off inflationary trends. All in all China will consider 2010 to have been a very good year.

At the end of October the IMF country inspection team concluded its visit to Hong Kong and found the Special Administration Region (SAR) “in high expansionary mode with a property bubble developing thanks to fast-rising credit growth.” On the positive side, the IMF also found that the former British colony had already started to benefit markedly from a new found willingness on the part of China to allow banks in the SAR to settle accounts between mainland China based companies and Hong Kong companies in Renminbi. This prepares the way, doubtless deliberately, for the SAR to play a much bigger role as an offshore financial centre for dealings in yuan.

The IMF suggested a range of measures Hong Kong might take to gently prick its property bubble, including imposing lower loan-to-value mortgages and more stringent conditions on borrowers’ ability to pay. Making credit harder to get and making less of it available, always has a dampening effect on property bubbles, provided the banks take heed in time, which they rarely seem to do. At the very least, one would hope that those involved in the Irish and Spanish property bubble disasters take the time to tick off the IMF lessons on their fingers and toes, on the basis that those who fail to learn from history are doomed to repeat it…

One of the more galling features for Western economists through 2010 was the glaring contrast between how their own economies were doing and the fantastic results being posted by Asian countries. By July 2010 for example, Singapore, had revised its previous growth estimate, which had been for a healthy 7-9% growth for 2010, upwards to 13-15%. As we said in a blog at the time, this put Singapore on track for the title of the world’s fastest growing economy – never mind Asia’s fastest growing economy.

There are some interesting “take-aways” from the Singapore experience as well. On independence in 1965 Singapore was in a mess, with high unemployment, sluggish growth, decaying infrastructure and social unrest.

Founded as a British trading post on the Strait of Malacca in 1819, Singapore’s economy today is heavily export orientated with IT and consumer electronics featuring heavily in the mix. Its port is one of the busiest in the world and as its Budget for 2010 makes clear, the country could give lessons to many a developed nation when it comes to incentivising innovation and R&D. All of which goes to show that there is much that Western economies can learn from so-called emerging economies in 2011 to dig themselves out of the hole their bankers and their governments have dug for them…

Tags: Asia , asset price bubbles , banking , central banks , China , Hong Kong , IMF , Singapore , World Bank
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  1. camber2 says:
    Mon Jan 17 18:40:06 GMT 2011

    With these newly emerging problems in China, could there be an advantage to using American Suppliers?

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