Crashing Asian markets during the financial crisis killed off the argument that Asia had decoupled from the US. Now it’s back.
Stock markets in Asia have grossly outperformed year to date and most economies appear to have bounced back faster than the US and Europe.
This has encouraged some brokers and economists to once again argue Asia’s decoupling from the US as a way to discount American economic problems.
WSJ: Frederic Neumann, an economist with HSBC in Hong Kong, still believes in decoupling. “I actually think we had decoupling in train since the middle of 2006, and that process got derailed temporarily by the breathtaking disruption in financial markets” when Lehman went under, he says. “Now we have it back,” he says, thanks in large part to loose monetary conditions.
Decoupling is a tricky subject since many people have different definitions for the term. Most people agree that Asian decoupling is happening to some degree. Asian economies are surely becoming less dependent on the US consumer, and recent strength supports the view that this process is continuing.
Yet most will also agree that Asian economies are still far from being anywhere near independent from the US, given the massive size of US consumer demand that Asian domestic demand needs to match.
WSJ: Americans are formidable consumers, spending nearly $10 trillion a year; consumers in China and India combined manage to spend only about a fifth that much. Mr. Neumann says the growth in Asia is making up for some of the slowdown in the U.S. This year, Asians outside of Japan will spend about $165 billion more than they did in 2008, according to HSBC’s forecasts, even as U.S. consumer spending shrinks about $30 billion. And total spending growth in Asia over the next five years is expected to far exceed that of the U.S.
Furthermore, if decoupling is happening, Asian governments aren’t helping it along. Mercantilist thinking still runs deep for most Asian countries, as seen by the fact that Asia’s penchant for US dollar recycling (to keep their currencies cheap) hasn’t diminished at all post-crisis.
The National: Data from the US Treasury indicate that China and other governments in Asia are buying more, not less, US government debt, an indication that they are trying to prevent their currencies from rising and reducing the competitiveness of their exports.
Sean Darby, another strategist at Nomura in Hong Kong, said: “A glance at the total foreign acquisitions of US treasuries suggests that Asian central banks have returned to their old habits of recycling US dollar export revenues and returning them once again into the US treasury market.
“Asia cannot seem to kick the habit of mercantilism that has been the bedrock of its growth for the past three decades.”
Thus while decoupling is of course happening as Asian economies develop, we’re probably still a long way from ‘decoupled’. As such, the health of the USA will still be the key driver for the direction of Asian ecomonies. In this regard, Asian market reactions to a potentially escalated US-China trade war will provide us an interesting litmus test as to whether the market believes in decoupling at all.