Asia’s Economic Miracle Has Peaked

Demographic trends, faltering exports, slowing growth in China and a credit bubble all suggest a new reality for Asia. 

Historically, economics has often driven the narrative surrounding presidential visits to Asia. Consider President Obama’s 2009 trip to China in the midst of the global financial crisis. It gave wings to a narrative about China’s rise and American decline.

The economic environment may be changing again. Only this time, the change is less dramatic and occurring largely out of the headlines.

Over the last four decades, Asia has been home to the world’s fastest growing economies. After a brutal financial crisis and recession in the late 1990s, Asian growth resuscitated and, in 2012, reached an amazing milestone when its share of global GDP hit 30 percent. Asia’s contribution to global growth has been even greater in recent years.

Despite the robust growth, however, there are reasons to believe the regional economy is not as healthy as it appears on the surface. Demographic trends, faltering exports, slowing growth in China and a credit bubble—all suggest that Asia’s economic miracle has peaked.

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The Asian Credit Bubble

Asia was the only region to sail relatively unscathed through the 2008 global recession. Unfortunately, this growth spurt was financed with an enormous credit binge.

- For Asia, total debt (household, corporate, government) reached a new high last year, running 208 percent of GDP. That is up a startling 50 percentage points since 2008.

- Bank credit, as a share of Asian GDP (excluding Japan), bottomed at 80 percent in 2002-2003, but then quickly climbed to 108 percent in 2013. It is now higher than in 1997, the year the devastating Asian financial crisis commenced.

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Credit intensity—the amount of borrowing needed to generate a unit of output—has surged, while productivity growth has tumbled. More and more debt is needed to generate one percentage point of GDP growth. In short, economic growth has become highly credit dependent. According to Bloomberg, Australia, Hong Kong, South Korea, China, Malaysia, Thailand and Taiwan have private debt ratios between 150-200 percent of GDP.

Much of the rise in debt is corporate. While Western companies have been deleveraging since the 2008 financial crisis, Asian companies have been doing the opposite. In fact, corporate Asia now has the world’s most leveraged balance sheets. According to Standard & Poor’s, corporate debt in Asia will exceed that of North America and Europe combined by 2016. China surpassed the United States in outstanding corporate debt last year, amounting to $14.2 trillion. Moreover, the credit quality of Asian corporate debt is much lower than that in the West.

Asian household debt has also been surging. According to Frederic Neumann, a managing director and senior economist at HSBC Holdings plc, credit growth in Singapore and Thailand exceeded that of the U.S. during its credit boom last decade. Meanwhile, Malaysia, China, Hong Kong and Korea have seen a bigger increase than the United Kingdom experienced during the 2001-2007 debt surge before the financial crisis.

Sagging Exports

While Asian exports have undergone steep declines when global economic conditions deteriorated (like during the 1997 Asian financial crisis, and the 2001 and 2008 global recessions), they have always quickly rebounded to double-digit growth whenever global growth returned.

Among Asia’s four export powerhouses—China, Japan, South Korea and Taiwan—export growth has declined dramatically since 2010 and is barely growing despite modest global growth.

Subdued consumer spending in the United States is partially responsible for the slowdown. According to the Wall Street Journal, U.S. imports from China, Japan, South Korea and Taiwan only grew 1 percent in 2013, down from 13 percent in 2004. Another reason for the export slump is structural.

Higher wages and slowing productivity have made Japan, South Korea and Taiwan less competitive as a manufacturing hub. In fact, Japan is expected to manufacture more cars outside of Japan than domestically next year for the first time in history. Even China’s decade of double-digit wage growth is causing it to lose lower-end manufacturing to less costly countries like Vietnam and the Philippines.

Demography: From Dividend to Deficit

Recently, most economists have come to the view that the changing age structure of the population, rather than population growth itself, can significantly alter economic development.