US embassy cable - 04SINGAPORE3211

UNCLAS SECTION 01 OF 03 SINGAPORE 003211 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, CH, SN 
SUBJECT: SINGAPORE-BASED EXPERTS WEIGH IN ON THE ASIAN 
ECONOMY 
 
 
1.  (SBU) Summary:  Southeast Asia is better positioned than 
in recent memory to face the challenges presented by a 
slowdown in the global economy, especially in China, 
according to several Singapore-based economists and financial 
analysts.  These economies inevitably will feel the pain of a 
downturn, especially a slump in electronics exports, but 
ongoing restructuring and outsourcing, particularly in 
Indonesia, Malaysia, Thailand, will help mitigate the risks 
involved.  All of the analysts were skeptical about the 
sustainability of China's high growth, but differed on how 
serious its economic problems were.  The most pessimistic 
argued that China's "hard landing," caused by over-investment 
and the bursting of several sectoral bubbles, would result in 
no more than 3 to 5 percent GDP growth in 2005.  Southeast 
Asia's substantial foreign exchange reserves would help 
cushion the impact of China's economic woes.  A hard landing 
might actually benefit Southeast Asia, one analyst argued, as 
global investors shifted their focus back to the region as a 
place better equipped to absorb investment.  That said, 
Southeast Asian economies, largely restructured since the 
1997 financial crisis, remain vulnerable to the risks of 
overexposure to China.  Of particular concern is that China 
continues to follow the more volatile pre-1997 growth model 
discarded by its neighbors.  One analyst warned that faced 
with a severe slowdown, China might no longer behave as 
"graciously" with its neighbors as it is now when its economy 
is still in an upturn.  End summary. 
 
2.  (U) Post took advantage of recent visits by a number of 
INR analysts to organize a conference entitled, "The Asian 
Economy:  Internal Changes, External Challenges."  The 
all-day conference brought together a number of 
Singapore-based Asia-watchers who spoke on topics ranging 
from how global trends are affecting Asia to the impact of 
Asian economic trends on the global economy and, in 
particular, China's role in the region. 
 
The Global Economic Slowdown: Not all News is Bad for Asia 
--------------------------------------------- ------------- 
 
3.  (U) Asia's trading nations face new challenges due to a 
convergence and tightening of a number of variables that 
underpin the global economy.  Manu Bhaskaran (Head of 
Economic Research for Centennial Group Holdings) singled out 
a number of cyclical demand drivers at play in this scenario: 
 weakening demand among the OECD and China; a rise in global 
interest rates; a tightening fiscal policy in the U.S.; a 
sharp decline in global excess liquidity since 2000; an end 
to the housing boom in many economies; and rising oil prices. 
 Not surprisingly, Bhaskaran explained, most major economies 
were forecasting slower growth for 2005.  For Asian countries 
in particular, Bhaskaran predicted an increase in the 
frequency of economic shocks related to electronics exports 
resulting from the industry's shorter cycles, price 
volatility and slumping global demand. 
 
4.  (U) Not all the news is bad, however, Bhaskaran said. 
Structural positives also exist, most visibly in terms of 
global competitive pressures that require companies to 
restructure in order to increase returns.  Outsourcing, he 
argued, was still at an early stage, with far more relocation 
of production to come.  Regionally, he cited the reemergence, 
or "returning to normal," of Southeast Asia -- particularly 
Indonesia, Malaysia and Thailand  -- where economies have 
begun to grow again.  This has triggered a new investment 
cycle, particularly in infrastructure.  India's growing 
competitiveness in manufacturing was also an encouraging 
development in terms of this overall restructuring process, 
Bhaskaran said. 
 
Shifting Trade, Investment and Consumer Debt Patterns 
--------------------------------------------- -------- 
 
5.  (SBU) China's rise as an economic powerhouse has changed 
the nature of Asia's economies.  Acknowledging that the 
movement of trade surpluses (with the U.S. and the EU) from 
the rest of Asia to China is an old story, beginning in Hong 
Kong as early as 1993, Clifford Tan (Director, Asia-Pacific 
Economic and Market Analysis, Citigroup) noted that this 
trend was having a significant impact on the region; all the 
major Asian economies were now running surpluses with China, 
the direct result of supplying the raw materials and 
semi-finished inputs that China's industries require.  Tan 
cited Japan, South Korea and Taiwan for having leveraged the 
China platform most effectively to advance their own growth. 
Japan, he said, was particularly successful, with Japanese 
companies achieving the world's highest rates of returns on 
their Chinese investments.  The resulting increase in cash 
flows were in turn fueling increased capital expenditures in 
Japan and further Japanese investments in the region. 
 
6.  (SBU) With the Asian Financial Crisis and its related sea 
of bad debts a thing of the past, cash was again flowing into 
Southeast Asia, observed Tan.  With so much attention focused 
on China, however, the resulting slack in corporate demand 
for domestic and intra-regional investment was being picked 
up by rising consumer demand instead.  This phenomenon, Tan 
said, was amplified by a "dearth of ideas in corporate Asia" 
about what to do with all the liquidity (except to reinvest 
it in China).  Manu Bhaskaran similarly noted the trend 
towards increasing consumer debt in Southeast Asia.  He saw 
this development as a double-edged sword, reflecting a degree 
of resiliency in these economies, but also the potential for 
a consumer debt crisis if the borrowing binge continued 
unabated, much as what happened in South Korea. 
 
China's Economy:  Careful With That Landing 
------------------------------------------- 
 
7.  (SBU) All of the conference's speakers were skeptical 
about the sustainability of China's high growth, but differed 
on how serious China's economic problems were.  Manu 
Bhasakaran questioned how China, with its "hubris-generated" 
growth, could avoid a hard landing (which he defined as a 
drop to 4-5 percent GDP growth).  It was too late for China's 
leaders to orchestrate a soft landing, he explained:  "Bad 
lending has financed bad investment."  China's primarily 
supply-sided growth had fueled a number of sectoral bubbles 
that continued to feed off further excessive lending.  In the 
absence of sufficient data, Bhaskaran observed, it was 
difficult to predict when China's economy would slow, or how 
Chinese leaders would respond to inevitable social 
disruptions. 
 
8.  (SBU) PK Basu (Managing Director, Robust Economic 
Analysis) lambasted China's "horrible" growth model.  With 
asset growth exceeding 20 percent the past two years and 
non-performing loans (NPL) equivalent to 40 to 50 percent of 
GDP, Basu claimed that these levels far exceeded anything 
reached in Southeast Asia in the run-up to the 1997 financial 
crisis or in Japan.  The Chinese leadership's focus on the 
NPL problem offered a glimmer of hope, Basu contended, but 
the overall momentum and pervasiveness of NPLs in the economy 
would nonetheless be extremely difficult to slow down without 
harsh administrative measures.  The most bearish of the 
speakers, Basu forecasted a hard landing for China in 2005, 
with GDP growth of only 3 to 4 percent (note:  other speakers 
argued that China's economy was still performing well enough 
to achieve growth rates between 7 and 9 percent.)  Southeast 
Asia would not escape unscathed, Basu said, but healthy 
foreign exchange reserves would help cushion the blow (as 
they would in China).  Additionally, Southeast Asia stood to 
benefit from China's hard landing as global investors shifted 
their focus back to the region as a place better equipped to 
absorb investment. 
 
9.  (SBU) Clifford Tan said he was "very concerned" about the 
China growth model and that much of the economic "street" 
research on China was "doggedly compromised," leaving 
important questions unanswered.  The situation was 
exacerbated, he explained, by the many international 
investment banks jockeying for China's IPO business and 
restrained in their criticism of Beijing.  Most Southeast 
Asian countries were forced to scramble for a new growth 
paradigm in the wake of the 1997 financial crisis, having 
been jolted into the realization that the old growth model 
was too risky in the long run, Tan explained.  China, on the 
other hand, continues to the adhere to this old model, 
grabbing growth-related low hanging fruits where it can. 
Whereas Southeast Asia was allowed to continue along this 
path for more than two decades, Tan admonished that the 
financial markets, having been burned so severely before, 
would not be so forgiving this time with China, perhaps 
giving China the "thumbs down" within another 5 years or 
less.  Tan said that Southeast Asia would feel considerable 
pain during this process given its increasing dependence on 
the Chinese economy as a driver for its own growth. 
 
10.  (SBU) Van Anantha-Nageswaran (President, Libran Fund) 
worried that strong China-led export growth in Southeast Asia 
was postponing needed economic reforms.  Yit Fan Wong 
(Managing Director, Country Risk Management, DBS Bank) argued 
that the impetus for economic reform in Southeast Asia -- 
company delistings, consolidations, better accounting, 
political reforms -- was not so much dampened by "China 
exhuberance" factors, as driven by the earlier experiences of 
the 1997 financial crisis.  The problem with absorbing excess 
cash flow, Wong said, was that Southeast Asian companies were 
still overly cautious, reluctant to borrow and more focused 
on cutting costs and increasing productivity.  Set against 
this backdrop, Wong explained, China had been very careless 
about its investment returns and its costs were rising.  With 
a 1997-style crisis looming in China, Southeast Asian 
countries might reverse direction and begin moving away from 
closer proximity to China's economic orbit over the next 
three to five years.  Under this scenario, Wong advised, 
China might no longer behave as "graciously" with its 
neighbors as it is now when its economy is still in an 
upturn.  This could translate into very different economic 
and political relations with other countries in the region. 
LAVIN