The Asian Economy Proves Itself to Be Resillient

Following my post earlier today about China on the rebound, Andy Xie comes in right as expected with another good home run:

SARS has merely interrupted East Asia's relentless gain in competitiveness, in our view. The region is widening its competitive advantage in trade through integration with China. This has added production experience to China's low cost. Multinational corporations are taking advantage of this production platform and shifting capital to China to optimize their global production distribution. These forces are widening the capability-adjusted cost gap between China and other production locations, resulting in rapid market-share gains by China.

Export companies in the region seem to have responded to the SARS crisis with resolve and creativity. Segmentation of shop-floor workforces, forward positioning of salesforces in main markets, maximum use of technology for logistics and customer interface are among the measures that appear to be keeping exports flowing. We believe this demonstration of the region’s competitiveness is deterring western buyers from considering sourcing diversification. No other region is close in terms of competitiveness, in our view.

The SARS crisis does seem to be hurting small and medium-sized exporters. Their growth depends on face-to-face interaction such as trade fairs and sales calls. As they are an important force in the region’s export sector, some export slowdown appears inevitable. Intra-regional trade is also likely to suffer significantly in the short term. China accounts for over half of export growth for other regional economies. A slowdown in China is likely to have a significant impact on the performance of other economies.Domestic demand appears less robust than exports. The severe downturn in the tourism, restaurant and entertainment businesses is causing domestic demand to underperform exports by a wide margin. Such a difference makes this shock a deflationary one...............

In the first two months of the year US imports from China rose by 42% from last year and accounted for 28% of the increase in the US’s non-oil imports. Last year, US imports from China rose by 22.4%, compared with a 2% increase for its overall imports. China’s exports to Europe in US-dollar terms rose by 20% last year, while the euro zone’s total imports rose by 6.9%. These figures suggest to us that a dominant economic force shaping the global economy today is multinational corporations’ redistribution of production to low-cost China.

Other export-oriented East Asian economies seem to be trying to complement rather than compete against China in global trade to achieve growth. Their exports are increasingly targeted at China, rather than competing against it in the US market. This adjustment process is combining the manufacturing expertise in the Tiger economies with China’s low production costs through capital redistribution to China. The region’s competitive advantage in global trade is rising as a result.

This new competitiveness benchmark is setting global tradable prices on the margin. Multinational corporations must obtain the same cost structure to compete. This, we believe, is why MNCs’ capital flow into China has been accelerating. Instead of producing in China for local sales, MNCs are increasingly optimizing their production globally on cost minimization, rather than market targeting. This is the main reason that China’s export performance increasingly reflects redistribution of global production, rather than global aggregate demand, in our view.
Source: Morgan Stanley Global Economic Forum
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