China is slowing. So is India. Japan has been like that for decades.
Did we just see a quick Asian Century pass us by?
I can remember back in university. We had a class called ‘Asian in the Economy’.
The subject focused on the monumental growth we might all see coming out of the region. China was going to be the dominant economy, we all thought. India would be up there.
But they don’t run the class anymore.
Maybe the students got sick of listening to amazing Asian growth that only existed in textbooks.
Look at most economies today, even those in Asia, few would call them strong.
Yet even now, as the financial world prepares for the next recession, the Asian Century might only just be starting…
Success will make you do silly things
Back in the 1980s, Japan was the envy of all.
Growth was amazing. The Japanese were rich. Japan became a tech hub. A place from which you could order gadgets and high-end tech related goods.
It wasn’t all that long ago that this nation produced cotton.
Clearly the question all Western businesses wanted to know was how Japan pulled it off? How did they jump into so many global industries and become a success almost overnight?
Well, a lot of it had to do with the guidance of money creation.
It’s why Japan grew so phenomenally after the Second World War. The bank of Japan created money for commercial banks to unleash into the economy.
Loans would not be given out to just anyone, though. It was understood by commercial banks that they needed to lend in specific areas of the economy.
They got much of that guidance from the Bank of Japan.
And it worked wonders…for a time.
But success can make you do silly things.
During the 80s, Japanese businesses got really silly. They were cash up, profitable, in search of more. Many decided to take profits and dabble in stocks and real estate.
At one point, 40–50% of Japanese businesses had divisions specialising in stock market or real estate speculation.
As assets in general rose, the Bank of Japan decided to step in. To control inflation they lifted interest rates. What happened next was one of the greatest recent wind downs in financial history…
A new century about to begin…
The Japanese stock index, the Nikkei fell 50%. Real estate prices followed stocks down. Japanese speculators were left with mounts of debt and assets worth far less.
It turned out to be a typical bubble in hindsight. Too much money chasing too few assets. And Japan has never been the same since.
They’ve also got other problems…an ageing population, mounts of government and corporate debt. It’s why some investors might buy gold in yen or take out a loan in Japanese currency.
If the honourable nation continues printing more money and the yen gets weaker, as a foreigner you benefit because of that.
But investors now look at countries like China, a manufacturing nation with too much debt, and predict something similar. ‘China is a bubble,’ they say. ‘They manipulate their currency, their export-led strategy will only work for so long.’
While India is a different beast, they’ve also seen growth slip. So, investors have chucked them in the ‘soon to fail’ pot too.
But China or India is not the next Japan. Maybe no country will be the next Japan. Maybe we’re about to see the Asian Century begin…the Australian Financial Review (AFR) writes:
‘The Financial Times tallied the data, and found that Asian economies, as defined by the UN trade and development body Unctad, will be larger than the rest of the world combined in 2020, for the first time since the 19th century. The Asian century, the numbers show, begins next year.
‘…What lies behind Asia’s economic eclipse of the rest of the world? The rise of China and India explains a large part of this trend. China is now a bigger economy at PPP [Purchasing Power Parity] than the US, accounting for 19 per cent of world output this year, more than double the 7 per cent recorded in 2000.
‘India is now the world’s third-largest economy, with a GDP about double the size of either Germany or Japan, both of which had economies larger than India’s on a PPP basis in 2000.
‘…Asia’s recent surge, which began with Japan’s post-war economic surge, represents a return to a historical norm. Asia dominated the world economy for most of human history until the 19th century.’
The temporary decline in growth for China and India, in my opinion, are just that. Temporary.
Both countries are still transitioning from farms to factories and services. Both are still trying to lift millions more people out of poverty.
All this take time…and a toll.
If you saw India’s recent economic figures, not only did GDP growth decline, unemployment also rose. Why? Because farms are becoming more efficient and need less workers.
It’s these workers, who will hopefully upskill and re-enter the workforce as a factory worker or in the service sector.
China is trying to do the same. While they might have fewer people on farms, they still have a lot of factory workers they’d like to see in cities and in service jobs.
This kind of transition takes time. Maybe a recession could speed all that up…
Probably another crisis, worse than 2008
You see, the Americans got lucky…
They too were once a farming nation. But today they are the dominant service economy. How did they manage to push workers from farms to factories and then to services?
The first came about through war. By entering the Second World War, the US government paid for farm workers to leave the homestead, upskill and work with machinery.
Then a few recessions and global trade put the brakes on manufacturing, pushing workers into services.
I hope China and India doesn’t have to go through a war to get workers off farms and into factories. But a recession might be just what the doctor ordered.
And yes, a recession may well be on the cards, or at least a wind down in asset prices.
MFS fundie, Barnaby Wiener is counting on it in fact. It’s why he’s holding 40% of his fund in cash and put options. The latter becomes profitable if prices decline.
The AFR writes:
‘Stock markets are about as expensive as they have ever been and Wiener says that despite the longest, strongest bull markets in history, none of the problems that culminated in a global financial crisis more than a decade ago has been solved.
‘There will probably be another crisis, and it will be worse than 2008 because policy makers have fewer options, while there is “less of a political appetite to underwrite financial assets,” he says.’
Even the market bulls are rethinking where stocks might go next. Pile into gold, pile into recession-proof stocks. Keep your capital safe. And then, when prices hit rock bottom, jump back in.
That’s what many of the pundits are prescribing.
But from a potential recession could emerge two phoenixes: China and India.
It might be just what pushes both countries over the edge to ramp up the transition from farm to factory and factory to services.
Of course, it won’t be an easy process. And it will be the people now that suffer to benefit later generations.
It’s not exactly how the textbooks see the Asian Century playing out, but how often do the academics get it right?
Editor, Money Morning
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