Jul 12, 2013

    StanChart: Asia fundamentals still robust

    China Daily/Asia News Network

    IN TIMES of market volatility such as these, we must look at the economic fundamentals to separate the "signal" from the "noise".

    The key question today is: Are the emerging markets fundamentally broken, or is this a brief phase in which investors re-adjust their portfolios in the light of the United States recovery becoming more sustainable?

    In Asia, the downward growth trend in China has been singled out as a potential trigger for a regionwide downturn.

    Additionally, rising debt levels among Asian governments, companies and consumers following the global financial crisis, encouraged by unusually low interest rates, have raised concerns.

    In China, the government is overseeing an economic soft landing because one of its strategic objectives is to restructure the economy from one which is driven by high levels of investment and exports to one driven by local consumption.

    Thus, it should not come as a surprise that economic reform, rather than economic stimulus, is the rage in Beijing today.

    The recent action taken by the central bank to tighten short-term funding for banks is also part of the transformation process, weaning the economy off ultra-loose liquidity.

    This leads to the rising concerns about debt levels across Asia. Standard Chartered Bank's recent study shows that an analysis of this issue needs to be carefully nuanced.

    After years of rapid economic growth, Asia excluding Japan's overall debt-to-gross domestic product ratio has just reached the world average.

    However, on a more granular scale, our study of debt and solvency across corporate, household and government sectors in Asia concluded that current leverage levels are broadly manageable, with areas of concern and pockets of opportunity.

    Household leverage across most of Asia - particularly in China, India and Indonesia - remains low and has the potential for growth.

    Malaysia's household leverage is high, as is Singapore's, by some metrics. However, both countries' household sectors have accumulated high liquid assets through mandatory savings.

    Our study shows that, while there are pockets of concern emerging, Asia's fundamentals remain robust.

    Strong government and household balance sheets and still-high economic growth rates across most of the region provide sufficient flexibility to counter inevitable bumps as the economic cycle turns.

    The writer is regional head of research, Asia, at Standard Chartered Bank.