China can’t be expected to lead a rescue of Europe’s teetering economy. But as the risk of pain in Asia grows, some kind of concerted effort is looking essential.
The leaders of debt-ridden Europe have got Asia on speed dial. The answers to the solvency nightmares of Greece and Europe’s other struggling economies, be they the purchase of bonds or contributions to the European Financial Stability Fund (EFSF), seem to European leaders like France’s Nicolas Sarkozy to lie at least in part in Asia’s cash-rich, high-growth nations.
Of course, the money trail that Greece and other eurozone debtors are now obliged to follow doesn’t only lead to Asia: the International Monetary Fund (IMF), the European Central Bank (ECB), the European Union (EU), the G-20 and the United States all have critical roles to play in restoring the economic equilibrium. There are many potential lifelines.
So where does Asia come in? Nowhere, many Asian leaders are arguing, pointing to the political folly of still predominantly poor countries like China or India spending their hard-earned reserves on restoring the comfortable lifestyles of better-off Europeans. However, a more self-interested approach would be to ask how vulnerable Asian economies really are to the eurozone’s potential failure, and to determine whether Asia, for its own sake, should take action to stop the European ship from sinking.
The global financial crisis of 2008-9 was instructive in revealing the extent to which Asia’s economic fate is still tied to that of the West. It became clear then that Asia wasn’t immune from catching the West’s colds, and that the continent was vulnerable through its reliance on a mixture of American and European trade and capital. Only a colossal stimulus package saved China, for example, from following the United States and Europe into crisis. So would things be any different this time around?
As of late 2011, Asia had only experienced marginal downgrades in expectations for the year ahead. The Asian Development Bank (ADB) has trimmed its regional growth forecast for next year from 7.8 percent to 7.5 percent; China is expected to grow by 9.3 percent, less than the 9.6 percent previously anticipated; and India’s growth outlook has dipped from 8.2 percent to 7.9 percent. These are hardly forewarnings of another 2009-style slump, never mind something even worse. Unfortunately, growth forecasts are fluid – and they could be revised much further downwards should Europe fail to effect a coherent rescue plan.
“If the current situation and political debate in Europe didn’t deteriorate further, Asian exports can continue to grow although with a bit of moderation,” explains Minsoo Lee, Senior Economist at the ADB. “In this case, the impact on Asian exports growth may still be kept limited. A slowdown in Europe and the U.S. can be compensated by healthy private consumption and investment, supported by growing intra-Asian trade. On the other hand, a disorderly resolution for the EU followed by another financial crisis could provoke a large negative impact on the U.S. and the world economy. In the case where the U.S. and EU slip into another recession, Asian exports will also be affected negatively.”
Rajiv Biswas, Chief Asia Economist at IHS Global Insight, subscribes to the view that Asia’s trajectory remains dependent on how Europe’s crisis plays out. Biswas regards Europe as being at a fork in the road, with the “muddle through scenario” on the one hand and the “chaotic scenario” on the other. “The muddle through scenario can enable Europe to have a mild recession and not a deep recession,” he explains. “In that scenario, Asia comes out fairly well, growth forecasts only slightly downgraded, they’re still relatively resilient.” This option is currently the more likely, Biswas believes, so long as the EFSF can be expanded beyond its current €1 trillion capacity, and provided the new Italian government implements convincing reforms. “However, if we go into the more chaotic scenario,” he warns, “bond yields rise, Italy starts to default, and you go into a more dangerous meltdown scenario. That would hurt Asia very badly.”
Photo Credit: World Economic Forum
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priest
ROTFL at the india related comments. why are indians so anxious to be recognized as a “global superpower”?
the fickle admiration of the global community isn’t going to put food on the table for millions of starving indians, restock medicines in indian hospitals, improve the quality of indian universities or contribute towards a scientific breakthrough in indian laboratories.
speaking as a chinese guy, i don’t think china ever consciously sought recognition as a “global superpower”. it’s very much more a liability than anything. having europe or USA telling you that you’re a superpower now and then asking you in the next breath to pay their debts or do ridiculous things like sacrifice economic growth on a massive scale to cut carbon emissions (when the USA itself never bothered to sign kyoto) is like having bernie madoff flatter you to bits so you can sign over your life savings. try getting him to return your phone calls after you’ve signed those savings over.
i have nothing but great respect for both the chinese and indian peoples. we’ve come far through *hard work*. don’t throw it away going ard looking for worthless flattery.
zha
I doubt whether the China can rescue itself in 10 years. The worries of every classes in the society become overwhelming. We can see more and more rich people immigrate abroad and more and more resources are grasped by previlieged groups.The consequences seem not to stop becauses we don’t have a way to seek solutions. I would like to come back to China. But there will be no places for me because I have no personal human accesses. I am a scientific researcher. If I get a position as a scientist, I need to spend much time on other political things.
Jung
Having lived and worked in China for 6 years, I strongly beleive that in 10 years time the world will see that China never stopped being “the sick man of Asia”… it just got better at hiding it.
China’s current economic growth represents that sudden burst of energy you often see in patients who are about to die.
ricky
@ raj
As for saving europe, dont live in a fools’ paradise. We ourselves dont have the adequete resources to wipe out our malaise. Our budget and fiscal deficit shows that.
Some 300 billion dollars is just a drop in the ocean for europe. Also, a lot of that is ‘hot’ money.
And again, we are no superpower. Not even a proper regional power.
It’s better to realise and accept the truth and work on setting them right rather than making laughable claims.
It’s always better to know where you stand and accept it with honesty and dignity. It goes a long way.
Liang1a
John Chan wrote:
Your confidence and assessment of current China’s capabilities in science and technology is not realistic and overblown. Blaming some of China’s internal incompetence and social issues on foreign trade is nothing but ad hominem fallacy. Without vigorous foreign trade, there will be no science, technology and idea interactions and exchanges with rest of world, those China’s achievements that your are proud of will be hard to come by, because in a closed door China, there will be simply no incentive, drive and push to force China to compete and invent.
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The fact is China’s development based on exports has come to a dead stop. The future development of China is based on its own domestic development based on the urbanization of the farmers predicated on China’s own indigenous technological advancement. Below is a quote in an article published in the last day where a Chinese official explains that China’s economic growth will depend more on its own technological advancement and its own urbanization of the farmers. The quote is self-explanatory. You can go and read the rest of the article at the link provided.
I will just point out that foreign trade is no longer mentioned. And if you have kept up with the Chinese official economic policies, the emphasis now is on domestic development and no longer on foreign trade.
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Quote from peopledaily.com:
http://english.peopledaily.com.cn/102774/7652854.html
Looking forward to the future, we have many advantages for maintaining fast economic growth.
First, the domestic consumer market is expanding rapidly. Second, there is great scope for improvement in human capital. Third, we have greater scientific and technical innovation capability. Fourth, the country is being urbanized at a fast pace. Fifth, the regions have much leeway in development.
spotlighter
China is in for a MASSIVE bust. Not a soft-landing, not a hard-landing but a crash-landing. Excessive stimulus, growing political/social instability and the popping of a MASSIVE real-estate bubble. Many, if not all of China’s elite, already have an escape plan in place, but are still stealing as much money as they can.
Add to this economic malaise in the EU and imminent trade barriers. Things don’t look good, Europe won’t rescue China.