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The New Normal

Nicholas Kwan 

Nicholas Kwan, Director of
Research, Hong Kong Trade Development


The global economy faces continuing uncertainties amid a slow recovery. That was the conclusion of a gathering of economists at the 2013 Coface Country Risk Conference, held in Hong Kong last month.

“The world has gone through a long period of globalisation and has finally come to a point of de-globalisation on a global scale,” said Nicholas Kwan, the Hong Kong Trade Development Council’s Director of Research.

Mr Kwan said globalisation, recognised as a major force in pushing the world economy over the last 50 years, is now seeing a reverse trend.

“This latest crisis, which started in the United States, many people see as a major reaction particularly to financial globalisation. In terms of capital flow across border, it has been down by almost 80 per cent at one point between 2008 and 2010. Even now, there’s only been about a third of the cross-border capital we’ve seen a few years ago. It will take a long time to cross capital flow to return to pre-crisis level.”

Trade Protectionism

 Container Port

The new normal: mature markets can expect to see growth of between one per cent and three per cent next year

De-globalisation is also reflected in the rising trend towards trade protectionism. Mr Kwan noted that, in the last two years, the number of new import restrictions introduced by G20 members affected US$660 billion worth of goods, equivalent to the size of France’s total annual imports.

“More countries are teaming up, not so much to accelerate integration among themselves but to erect fortresses – barriers to keep other non-members from penetrating their markets,” he said.


A more flexible renminbi exchange rate is predicted as part of the Central Government’s economic reforms (photo: EyePress)

Mr Kwan cited several mega-regional free-trade agreements (FTA) in the works, including the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, set to be concluded in 2015. Those FTAs, he said, cover populations of 800 million to several billion, or one-third to one quarter of the world’s GDP and trade. “So these are huge trade groupings if they succeed,” he said.

“We can’t afford to have too many of these types of mega-trade agreements. Even worse, we can’t afford to have these mega-trade agreements being used to erect trade barriers against non-members. But there’s increasing signs that these mega-trade agreements are discriminative and exclusive in nature to non-members.”

As countries adopt policies to protect themselves, the Chinese mainland recently launched the pilot Shanghai Free-Trade Zone. “The thinking behind this is very different from five or six years ago,” said Mr Kwan. “The area itself might be small, but the location is at the heart of China’s economy. If they really manage to do what they want to do, it could have profound changes for Shanghai and the rest of China,” said Mr Kwan. “But, more importantly, this policy direction shows to other countries what needs to be done in the midst of the de-globalisation trend.”

China Factor

 Louis Kujis

Louis Kujis, Chief China Economist, Royal Bank of Scotland

For major economies still struggling to recover from the 2008 financial crisis, a return to growth will take time.

“It’s a hesitant recovery, but we’re starting to see the light at the end of the tunnel,” said Louis Kujis, Chief China Economist at the Royal Bank of Scotland.

Mr Kujis is particularly upbeat about economic reforms on the Chinese mainland. Although monetary regulations are still being determined by policymakers, he said that mainland authorities are now “mimicking market pressures to prepare the market to where policy is moving.”

While he believes that the renminbi is no longer undervalued, he thinks there’s room for further appreciation. The People’s Bank of China, which he says has undergone an “interesting change of thinking,” understands this. “What will be worth watching is the degree of flexibility in the exchange rate. We expect to see monetary reforms to make the exchange rate more flexible.”

Unbalanced Growth

Banny Lam 

Banny Lam, co-head of
Research and Chief Economist, Agricultural Bank of China International Securities

The expected tapering of credit liquidity by the US Federal Reserve has led to instability in the world’s most promising markets, in emerging Asia. In June and September, Asian currencies suffered, and stock markets plunged because of loss of confidence by foreign investors. But don’t expect a repeat of the 1998 Asian financial crisis, as fundamentals have greatly improved, according to Banny Lam, co-head of Research and Chief Economist, Agricultural Bank of China International Securities.

The nascent recovery in the developed markets may not benefit Asia, he added, with the United States economic recovery primarily driven by business and property investment rather than private consumption. China and India, he said, face slower growth, with demand for commodity imports likely to drop.    

“The economies in East Asia are facing a new reality,” Mr Lam said. External demand cannot sustain the region’s continuing economic development, with export growth expected to be lower compared to the 2010-2011 period. Instead, emerging Asia will need to focus on building its domestic market.

“It will be a challenge to take their economy to the next level,” Mr Lam said. “How to build domestic demand will take time. They will need to privatise more industries and cut subsidies,” Mr Lam said, noting that over-reliance on cheap money from the US Quantitative Leasing policy has made Asian countries susceptible to external shocks.

Manageable Threat


Emerging Asia can no longer rely on exports to sustain growth, which will need to come from the domestic market (photo: EyePress)

That said, the threat of major central banks withdrawing excess liquidity into the global economy is “manageable,” according to Mr Kwan, who said that monetary authorities are less capable of pumping liquidity into systems.

With major central banks, particularly the US, increasingly needing to pull back liquidity, Mr Kwan said that, in a conventional case, central banks have all the tools. “So why are markets nervous? In a normal case, there’s no need to. But the problem is we’re not in a normal situation.”

He said that, for the next few years, the world economy should expect slower growth, especially for developed countries, which he predicts will grow between one and two percent.

“Next year should look decidedly better,” Mr Kwan said. “Europe will likely go back to positive growth by one per cent and Japan by two per cent. The US, with the broadest base of recovery, may hit three per cent. But all these do not really go back to pre-crisis levels. It’s the new normal.”


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