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A Delicate Balance: Asia's Opportunities and Challenges

Pravin Advani

Pravin Advani
Global Trade Executive, Asia Pacific
J.P. Morgan

Economies in Asia are recovering from the global financial crisis with greater ease than their counterparts in Europe and the United States. Opportunities are still abundant across the region, but significant challenges remain.

A glance at global trade figures since 2008 shows how the world trade pendulum has swung decisively towards Asia. The region endured a shallower dip in trade in 2008 and 2009 and enjoyed much stronger growth in 2010 and 2011 compared to the Euro zone and the United States. Asia has already surpassed the trade peak it reached in 2008, while activity in the Euro zone has stalled.

There is a combination of factors that could have contributed to this. First, South-South trade flows between Latin America, Africa, China and India have been flourishing spurred largely by rising demand in China and India for raw materials and by investment flows into Latin America and Africa. Second, there has been a growing number of free trade agreements within the region, which will continue to drive intra-Asia trade. Third, regional players have been looking beyond traditional markets and making successful inroads into new and non-conventional markets.

For example, a report by export advisory group, Beijing Axis, highlights that China has doubled its market share in centrifuges and filtering and purifying machinery — a $45 billion global export market – from 3.5% to 7.1% between 2007 and 2010. They did not achieve this by taking on established producers in the developed world. Instead, they expanded into Brazilian, Russian and Indian markets.

The Chinese way

When financial crisis struck Asia in the late 1990s, the strength of China's economy lifted the region from its slump. In the same way, China has helped cushion Asia from the full brunt of the 2008/9 downturn. A World Bank report puts China's contribution to world GDP growth at 14.5% in 2009, up from 4.6% in 2003, making it the largest contributor to world economic growth today. To sustain this level of growth, Chinese manufacturers must move up the value chain.

As one economy moves up the value chain, it is common to see another country or region step in to fill the gap. Higher wages in China are creating opportunities for lower cost producers across Asia, especially in the garment and textile industries. Cambodia enjoyed an increase in garment exports of 35% in 2011, while Sri Lanka is fast becoming an apparel hub, with estimated exports valued at about $5 billion by 2015.

Research firm Beijing Axis reports that the competitiveness of simple labor and raw material-intensive China-made products has been eroded by a gradually appreciating Chinese currency, government-imposed export duties and quotas, more stringent environmental regulations, and a reduction in the subsidies that have provided access to cheap land and electricity. In many respects, these changes have been planned. Each of the Central Chinese Government's five-year plans has sought to shift productive resources to higher-value and more knowledge-intensive industries. At the same time, they have increasingly sought to discourage low-value-add, low-end manufacturing. China is rapidly repositioning itself as a middle-income industrialized nation.

In the current phase of its remarkable growth story, China is showing signs of a slow-down. The clearest evidence yet is a recent move by the People's Bank of China (PBOC) to lower its benchmark interest rate on RMB deposits and loans. This corresponds with the launch of a consumption stimulus program intended to stimulate Chinese domestic spending and offset the impact of declining exports. China has also launched an aggressive plan for infrastructure expansion that includes railroads, airports and highways.

India rising

China is by no means Asia's whole growth story. India's economy is powered primarily by its service industry, agricultural exports such as tea and rice, and the import and export of oil, oil products, coal and other minerals, with China providing a major market for India's iron, copper, and cotton exports.

After years of high single-digit GDP growth, India is also facing strong headwinds on the back of high fiscal and current account deficits, core inflation, slowing foreign investment and a gradually depreciating currency. India's prospects, however, remain positive driven by rising literacy rate and a growing workforce. Some have predicted that India's rate of economic growth could overtake China's by the next decade, making India Asia's fastest-growing exporter.

Conducting business in India can be difficult. Regulatory nuances continue to influence financing and trade growth in the region, and clients doing business there continue to face challenges built into the country's complex political and legal framework. Trade services remain document-intensive in India (as they do in much of the rest of South Asia), and must be aligned with a multitude of different regulatory requirements. But a wave of change seems to be sweeping the nation as the result of a strong push by banks towards automated straight-through processing. This move towards electronic banking should contribute positively to India's economic growth by enabling businesses to improve their operating efficiency and better manage working capital.

Lands of opportunity

Asia may be going through a period of adjustment and rebalancing, but there is no shortage of regional success stories. Indonesia and Vietnam are two more examples of vibrant economies in Asia. Indonesia's GDP exceeded 6% for the sixth consecutive quarter, thanks to robust investment gains, strong domestic spending that helped offset a slowdown in exports, and a ready pool of workers as world's fourth most populous country. Vietnam has been recording moderate GDP growth but continues to draw international attention as a gateway to Cambodia and Myanmar. The recent by-election that just ended in Myanmar is also expected to usher in a period of democratic reforms and reductions in international sanctions.

In North Asia, South Korea's resilience has proved remarkable. According to the Organisation for Economic Corporations and Development's (OECD) latest Korea Survey, Korea has not only recovered faster and more vigorously from the crisis than other OECD countries, but currently enjoys lower unemployment and government debt. Much of this success can be attributed to the country's dynamic economic growth strategy. But to sustain its current level of growth, Korea must still deal with a range of impending economic issues that include an aging population and income inequality.

Hong Kong, for a long time the gateway to China, is constantly reinventing its operating model in a bid to stay ahead of regional competition. Leveraging its standing as one of the world's most open economies and a key offshore RMB trading centre, it is currently positioning itself as the ideal offshore funding location for large Chinese corporations looking to set up overseas trading arms.

RMB Trade Settlement Programme

There has been tremendous progress in the establishment of RMB as an international trading currency. In July 2009 a pilot program was launched, enabling 365 companies to settle international trades in RMB. Following progressive expansion of the scheme, RMB now accounts for 10% of China's foreign trade transactions, with Hong Kong being a key beneficiary of RMB developments.

In March this year, PBOC expanded the scheme to allow all mainland companies with an import/export license to invoice or pay for cross-border deals in RMB. China's National Advance Payment System will also adopt Society for Worldwide Interbank Financial Telecommunication (SWIFT) message standards in order to improve and automate cross-border RMB processing.

While RMB trade volumes remain low as a percentage of total transactions, potential for growth is immense. For now, most of this business is channelled through Hong Kong. However, other major financial centres around the world, including London and Singapore, are also building up their RMB capabilities.

Timing could not have been better. According to data from the SWIFT in May this year, RMB is now the third largest currency in the global issuance of LCs by value in April, after the dollar and euro.

Addressing Asian challenges

If not addressed in time, some key challenges could slow Asia's growth. One pressing issue is developing infrastructure in tandem with economic expansion. In 2010, India announced a plan to double its infrastructure spending to $1 trillion over the next five years. China is reported to have set aside $1.3 trillion on new rail and road infrastructure. Across the region, sources put the estimated infrastructure spending at $8 trillion between 2010 and 2020.

Although both political will and economic drivers are firmly in place for this kind of development, funding for such capital-intensive projects will be a major challenge. Export Credit Agency (ECA) financing is one tool that governments and companies may use to get nationally important projects up and running. For buyers and their governments, ECA support would mean the ability to secure financing at attractive rates — even in countries that traditionally carry more risk. For banks, the risks associated with long-tenor loans are mitigated by ECA guarantees. And for suppliers selling high-value equipment, having a national ECA behind them can help close a deal.

Asia continues to seek a delicate balance between economic growth and an affordable standard of living. Inflation is a stubborn problem, with high food and oil prices threatening to impact political and social stability. Additionally, the Euro zone problems related to austerity and the risk of sovereign default could also impact Asia's growth momentum and its efforts to diversify its economy.

As Asian corporations continue to grow globally, they will have to deal with more trading partners, more complicated supply chains and higher volumes of cross-border activities. They will need to gain greater real time visibility into their trade transactions in order to better manage risk from conducting business in today's volatile operating environment.

The roles of the developed world and the emerging world are changing. All things considered, there is a new and more balanced world trade picture, with Asian companies serving more customers closer to home and moving up the value chain. For Asian corporations, meeting the developed world's demand is still important, but it is not the only growth strategy. The challenge will be for Asia to develop new and even more creative ways to sustain its economic growth.

About the Author

Pravin Advani is Managing Director and Global Trade Executive, Asia-Pacific for the Treasury Services division at J.P. Morgan. Based in Singapore, Advani leads the global trade team in Asia, focusing on strategy, sales, client services and product development, among others. An industry veteran with more than 20 years of experience focusing on the pan-Asian trade industry, along with the Eastern Europe and Middle East Markets, Advani was most recently Regional Head of Trade & Supply Chain, Asia Pacific at RBS/ABN Amro, where he oversaw the division's trade and supply chain business, rolling out key Asia-Pacific programs. Prior to this role, Advani was Trade Services & Finance Head of Citigroup's Global Transaction Services business in the C.I.S., where he focused on strategy, product development, execution and risk management.

Advani is a Chartered Accountant with the Institute of Chartered Accountants of India, and he graduated from Mumbai University, India with a Bachelor of Commerce degree. He has also completed a number of management and leadership courses from a variety of institutions, including London Business School.

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