Where, then, does the greatest risk to Asia lie: a drop-off in trade, or the drying-up of lending as Europe’s problems cascade down through the financial markets?
First, trade. Asia’s reliance on exporting goods to the West is diminishing all the time. According to the ADB’s Key Indicators 2011 report, “intra-Asian exports accounted for nearly 54 percent of total exports of Asia and the Pacific in 2010,” thanks to fast-growing domestic demand in many Asian economies. However, the combined GDP of the United States and Europe, at 45 percent of the global total, continues to outstrip Asia’s share of around one third. Asia’s intra-regional trade in finished (i.e. value-added) goods is also still very low. So the “de-coupling” of the Asian and U.S./European economies about which academics have speculated for years isn’t really occurring. Rather, new linkages are forming between Asian economies and between Asian and other emerging market economies in places like Latin America at a faster rate than new linkages are forming between Asia and the West. It’s important to appreciate that the value of trade between the United States and Europe continues to rise – it’s only declining as a relative share of Asia’s total. In 2011, Asian exports to Europe still equated to 17.7 percent of total exports, and almost 7 percent of regional GDP.
So on the trade side, several Asian economies are relatively exposed to European risk, and to volatility in global trade more generally. In 2009, according to Business Monitor International, the export of goods valued as a percentage of GDP was highest in:Enjoying this article? Click here to subscribe for full access. Just $5 a month.
· Hong Kong: 154%
· Singapore: 148%
· Malaysia: 82%
· Vietnam: 62%
· Thailand: 57%
· South Korea: 43%
By comparison, goods exports only amounted to 24 percent of the value of China’s GDP, 13 percent of India’s and 11 percent of Japan’s – making them better insulated against trade shocks. It’s also fortunate that none of the countries listed above export a large share of their goods to the eurozone, the highest proportions coming in South Korea (9.8 percent), Hong Kong (9 percent) and Malaysia (8.4 percent). So, while a eurozone crisis would also dent exports to countries in the rest of Europe and possibly also the United States, we are most likely looking at a downgrade of GDP growth, rather than anything more calamitous.
The trade dependency of Hong Kong and Singapore puts them at particular risk of recession – and signs of this can already be seen. The latest economic data released in November showed that Hong Kong narrowly avoided recession in Q3, as the economy grew just 0.1 percent following a 0.4 percent contraction in Q2. This prompted the SAR Chief Executive Donald Tsang to warn that there could be some “bad times” ahead, with Hong Kong now expected to grow at just 2 percent in 2012. After a stellar 2010, Singapore has experienced the same pattern of slowdown, contracting in Q2 and narrowly returning to growth in Q3. There, too, growth could fall below 3 percent in 2012.
Second, capital. Amid the prevailing image of Asia as banker to the West, it’s easy to overlook the large sums of Western – and in particular European – capital still in play in Asia. “The potential for Europe to deliver a liquidity jolt to financial markets might have been underestimated,” explains the ADB’s Minsoo Lee, pointing to the fact that European lending in Asia totaled over $1.5 trillion by September 2011. Lee lists the largest tranches of that lending as being in Hong Kong ($387 billion), China ($268 billion), Singapore ($205 billion) and Korea ($179 billion). Of the countries not on this list, Vietnam – its economy already struggling with high inflation and relatively high debt levels – is most dependent on European credit, and the precarious state of the economy could result in Vietnam suffering the most from any European slump.