Running out of puff

THAT Asian economies are in much better shape than in 1997-98, when the region was caught up in an unprecedented financial crisis, ought to be reassuring. That officials feel the need to keep making this point is less so—and many investors fear the worst. From South Korea to Indonesia, exports are falling and economic growth is sputtering. Currencies have weakened (see chart), with the Indonesian rupiah and the Malaysian ringgit falling to their lowest levels against the dollar in nearly two decades. Meanwhile, the debts of companies and households are rising. Above all Asia’s locomotive, China, is losing power. The question is how much worse things can get—and whether official assurances of resilience are to be believed.

Even though the slowdown in Asia is not yet something to panic about, it is sharper than was expected earlier this year. Japan faces (yet another) possible recession (see article). The Asian Development Bank says that, excluding rich Japan, growth for the region will be 5.8% this year, down from 6.2% last year and an average of nearly 8% over the previous decade. At the start of 2015 the bank was forecasting no change in growth.

It is reasonable to expect further deterioration. Exports have long driven Asian economies. In July they were nearly 8% lower in dollar terms than a year earlier. The slide has continued. South Korea is a bellwether for Asia’s trade-focused economies. Its exports were 8.3% lower in September than a year earlier, the ninth consecutive monthly decline.

Weak local currencies mean that the export performances of Asian economies look better when measured by volume rather than dollar value. Even so, exports still look anaemic. ANZ, an Australian bank, talks of a “regional trade recession”. Surveys of purchasing managers in factories in South Korea, Taiwan and Malaysia all report declining orders.

The simplest explanation for the slowdown is China. After three decades in which the country averaged double-digit growth, it is now growing by just over 7%—and even that lacklustre official figure looks overstated. What makes such a slowdown especially hard for economies in China’s orbit is a change in the composition of Chinese growth.

Until now the Chinese economy has been powered by investment. But it is shifting towards a greater reliance on consumption. Investment stoked China’s ravenous appetite for commodities, providing a big boost for resource-rich economies. By contrast, consumption is satisfied more through China’s own production. Whereas sales of South Korean cosmetics and top-flight Japanese lavatories are enjoying a boom in China, their manufacturers’ good fortune is far from enough to offset the struggles of Indonesian coal miners or Malaysian oil producers. Meanwhile, China’s exporters are out-competing others in Asia. Its share of world exports rose from 11.6% in 2011 to 14.3% in June, says Andy Rothman of Matthews Asia, a money firm.

Regional economies also have home-grown reasons to worry. With few exceptions, they built up debt in recent years, taking advantage of the cheap financing made available by the rich world’s extremely loose monetary policies. Asian debt, including household and corporate debt, rose from less than 150% of GDP in 2007 to around 200% by the end of last year. Debt rose fastest in China, but it also jumped in Hong Kong, Singapore, South Korea and Thailand.

This does not mean a replay of the crisis of 1997-98, in which debt played a crippling part. Officials highlight the differences between now and then. In the 1990s speculative money coursed into Asian economies. Countries had fixed exchange rates and small reserves of foreign currency, leaving them with few shock-absorbers when foreign investors pulled out. What began as a seemingly localised problem in Thailand spread rapidly.

Asian governments have since done much to strengthen these areas of vulnerability. They have amassed much bigger foreign-currency reserves, enough to cover several months of outflows. They have issued debt in their own currencies rather than be over-reliant, as before, on foreign-currency borrowing and flighty foreign investors. And today exchange rates are mostly flexible. These differences have allowed the pressures on the Indonesian and Malaysian currencies to play out over many months rather than in a sudden collapse. Fitch, a ratings agency, says that every country in Asia bar Mongolia and Sri Lanka will be in a stronger position to meet external liabilities in 2016 than it was in 1996.

Concerns have shifted, however. Commodities now occupy a much bigger share of export earnings around Asia, with Indonesia and Malaysia especially exposed. And while Asian governments have been more prudent in their borrowing, their companies have taken risks. Corporate borrowing has fuelled the rise in overall debt levels, even if not to the same extent as in the 1990s. Earlier this year Morgan Stanley found that 28% of the corporate debt of big listed companies was denominated in dollars, not local currency. In South Korea consumers are the worry, with household debt at around 160% of disposable income. Frederic Neumann of HSBC says that rising consumer debt has become “an inescapable necessity to keep the wheels turning” in South Korea.

Declining exports, plunging commodity prices and tighter funding for companies and consumers: it is an unwelcome combination and it is hobbling growth. Asia may well have the defences to stave off a crisis. But a protracted slowdown is no one’s idea of a good time.