More on Asia and Decoupling

About a year ago, when US and Europe were down, Asia had rebounded and many people were saying that it was a sign Asia had successfully decoupled itself, I cautioned against such a view in a post “Have We Arrived?”

Just about a month ago, China reported that its growth has slumped to a three-year low of 7.6 percent in the second quarter and one main reason was the continuing bad news coming out from Europe amid a slow US recovery. If my argument then was not convincing enough, surely the arrival of these statistics would add substance to it now. It is however not the intention of this post to do just that. Rather, I would like to speculate on why the data a year ago would have misled many people into thinking that Asia had decoupled from the West when it didn’t.

Central to my speculation is the concept of expectations. Few people in China would have expected the crisis in US and Europe to drag for so long considering all the actions taken by the respective governments. They had continued to produce and stockpile their products ready to be exported when the West demanded them. This act of production and stockpiling could have contributed to the rebound observed a year ago. Obviously, this expected demand never materialized. Since the existing stock had not been cleared, there was no need for new production and hence the observed current slowdown.

If domestic consumption had increased substantially over the same period, it would have cleared at least some of the existing stock but this was not the case. Apparently, domestic consumption either remained stagnant or did not increase sufficiently to replace the demand from the West. In fact, if manufacturers were to factor in expected increase in domestic consumption into their production decision a year ago, their existing uncleared stock would have been even higher than if they did not do so. In other words, both the expected increase in demand from the West plus domestic consumption that never materialized has resulted in the current slowdown.

Right about now, people who disagree with this speculation would say that it depends on which part of Asia you are looking at and would point to an Asian country further south of China to make their point: Indonesia. Growth of domestic consumption in Indonesia has been phenomenal, an excellent example of one way a country could decouple itself from the West. Perhaps, China could learn a thing or two from Indonesia about boosting domestic consumption. Is it?

Well, I would again warn against jumping straight to an unsubstantiated conclusion. Indonesia tomorrow could be China today. Indonesia as part of Factory Asia is a supplier of parts and components to China, the final assembler. The current increase in domestic consumption could have been driven by expectations that China will continue to demand parts and components, which is highly unlikely if recent statistics can serve as reliable indicators of how things will evolve.