Bomborra Media
Are Asian Savers Euro Saviours?

Published on Nov 29, 2011 by Luke Hunt

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ASIAWATCH — As the Eurozone debt crisis spirals from one embattled bond market to the next, it is becoming clear we are likely heading into a double dip global recession.

Whilst economic fundamentals of the United States may in fact be improving, investor pessimism is quickly spreading across the globe.

The gloomy outlook has spread from Ireland and Portugal to Spain and Greece. Italy was the next to face the wrath of the bond markets, with Hungary the latest. The question has become – when will it be France?

In this, the Asian Century, world leaders are turning to the emerging economies of the Far East as a potential saviour for the unfolding debt crises.
Germany’s Chancellor Angela Merkel and French President Nicholas Sarkozy both pointed to China as being a potential banker for the much-derided Eurozone bailout fund. Alas, China can’t be everyone’s banker and the United States has long been their preferred customer.

But world leaders are right to turn to Asia’s emerging economies. They need to do more to jumpstart the global economy, for their own good more than anyone else’s.

Most Asian economies are in pretty good shape if you look at what is arguably the most important indicator of an economy’s long-term health – that being the savings or investment rate.

These closely aligned economic variables represent the fraction of a country’s total income that is saved or invested.

Much financial news in Asia focuses on the extreme rates of inflation, the corruption and the waxing and waning of the respective share markets.

The phenomenal rise of the savings and investment rates often goes unnoticed.

And the populations of most of Asia’s emerging economies are assiduous at squirrelling away their hard earned cash.

In 2010, the Chinese banked 38 per cent of their income, whilst Indians put 34.7 per cent away for a rainy day. This savings culture has contributed to a global imbalance, however, between developed and emerging economies.

These developing countries will need to spur domestic spending to buffer themselves from American or European shoppers who will be spending less on Chinese toys, Vietnamese clothes or Indonesian home wares. It is likely we will continue to see the buoyant saving (or paying down debt) and the stagnant investment that is pervasive in the current economic environment. This means governments will be reliant on previous dollar-pinching Chinese emerging classes to drive economic growth.

Governments across Asia, and particularly China and India, will need to do more to stimulate consumption and investment and discourage savings. In effect, this is mostly the opposite of what Chinese leaders have done in the past. China’s extremely high household savings rate is a way of forcing the poor working class to subsidize the Chinese export sector.

People also view saving as a purely precautionary measure. The social safety nets in many Asian countries are appalling or non-existent. Households need to save to send their child to a decent school or in case a relative becomes sick.

Governments need to promote financial-sector development and improvements in social safety nets, both of which will reduce the need for pre-cautionary savings. Such measures of course cost money and it is unlikely that Asian leaders will want to spend money on healthcare in the midst of a race for militarisation.

All this means that economic forecasters are probably right when they suggest global imbalances are unlikely to be eliminated any time soon.