First Signs of a Global Economic Orientation Towards Asia

Are we witnessing the re-emergence of Asia as the centre of world commerce again? has the thaw begun?

In the past couple of weeks there has been some interesting developments emerging from China, and increasingly interesting reactions from share market investors. The first development has been the announcement that China  has reset growth targets to 7.5%, which has been accompanied by investor concern around the world. The second major development has been the announcement that China has become a net importer for the first time in many years. This development too has led to falls in the share market and currencies such as the Australian Dollar, which is now seen as somewhat of a proxy for Chinese economic success. The reaction of the share market to each of these developments has been perhaps one-dimensional and not thought out or considered.

So what can we read into these developments?

Well firstly, these announcements do have a lot to do with the global economy and both developments are linked. Economic growth in both North America and Europe has been low, and there has been a parallel fall in demand for Chinese exports. This does not necessarily mean there is a fall in export growth from China, as there was still growth of exports in the last reporting period (17%), it was just that import growth well exceeded exports (35+%). This led to a net import position.  Chinese exports are still in demand, but the growth phase may now have slowed.  This slow down has been replicated in the new growth figures announced.  It appears the market is unhappy with the lower growth targets, after nearly a decade of growth above 10%. Any follower of economic commentary on China over the past five years will remember the often stated concerns about China overheating due to unsustainable growth targets.  These commentators suggested a target approaching 8% was much more sustainable in the long-term. So the growth target announced in China is still in this acceptable band. In my view the markets and China watchers should be rejoicing the sustained levels of growth in China and it’s resolute strength in withstanding the economic crisis in North America and Europe.

The Chinese middle class is emerging and they are increasingly seeking premium products. This presents a great opportunity for those international businesses with a capacity to supply

The effect of these developments on geopolitics is probably mostly related to the relative  value of the Yuan (RMB), which many western politicians particularly in the US have criticised for being undervalued. The trade deficit just posted demonstrates to the Chinese that the currency positioning is about correct (despite a small depreciation in the Yuan against the $US in recent days). I would expect the Yuan to remain around this level for the foreseeable future and not appreciate further against the $US in the manner that we have seen in the past 5 years (which has been around 30%).

So What does this mean for the everyday business engaging with the Chinese market?

Well I would suggest it is not bad at all. Chinese government forecasts are moving towards an inward and domestic focus. The  incoming Chinese leadership will most seek to expand the domestic economy and lift more people out of poverty and into the middle class. This will have a positive effect upon most businesses in countries such as Australia and the US. The emerging middle class will have a greater capacity to purchase foreign products, particularly in premium segments. This is all part of the global transition to the Asian Century, where a structural change is occurring in the global economy. The years to come will see China become a net consumer of products and services from the west. So if your business is geared towards selling value added products, then the Chinese market could well be the place to market your products in the years (or months) to come. If you are seeking to source low-cost labour for manufacturing….well I would be seeking other markets in the region. The Asian Century is here to stay and the rules of engagement are changing. These recent developments in China may well be the first signs of the global economic transition towards Asia.

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About Nathan H. Gray
Nathan H. Gray is Managing Partner of AsiaAustralis. AsiaAustralis is a stategic consulting service partnership established by experienced international management consultants to assist private and public organisations achieve their strategic objectives in trade, investment and government relations throughout the Australasian region with a particular focus on SE Asia. Based in Adelaide, South Australia, AsiaAustralis has a network of associates throughout Australia and Asia that can be called upon to assist and facilitate major projects, business opportunities and government to government trade and investment facilitation. To Contact AsiaAustralis check out the website: www.asiaaustralis.com or send Nathan an email: nathan@asiaaustralis.com

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