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The business of Chicken Feet

Monday, 09 February 2009

As reported in the recent Financial Page International newsletter Chicken feet fetch a mere 2 cents in the US, but a hefty 55 cents in China. Tyson, the food company from whom that delicate piece of information emanates, makes a tidy profit shipping feet from the US to China. In the process it subsidises Americans and their penchant for chicken breast.

That is a useful metaphor for the benefits of trade between Asia and the west. But, to judge from a torrent of depressing economic statistics on Thursday, that arrangement is fast eroding.

Singapore, an open economy described as the "canary in a coalmine" of world trade, has taken the near-unprecedented step of raiding its reserves to fund a US$13.7bn (€10.6bn, £10bn) stimulus package designed to stave off the worst ravages of recession. Its economy is expected to contract up to a 5% this year, compared with 7.7% growth in 2007. The main culprit is an expected 20% slump in exports, led by chemicals and electronics.

Singapore is not alone. Japan, whose growth is hopelessly tied to exports, watched helpless as December's overseas shipments fell an astonishing 35% on the year. Plummeting sales have forced nearly a $3bn operating loss at Sony, raising the spectre of another round of job cuts. Japan's economy, fresh from six years of growth, is now expected to shrink for two straight years. It is also likely to sink back into deflation, having spent most of a decade trying to crawl out of that particular dark hole.

At least Japanese companies can blame the super-strong Yen. But South Korean exporters have met a similar fate, despite the fact that the Won has depreciated sharply. Output in South Korea shrank 5.6% in the fourth quarter from the previous three months, largely because of a 12% slump in overseas shipments.

There are two broad explanations for such a sorry state of affairs. One is that the financial crisis in the US and Europe has forced a slump in consumer demand, as shoppers build up savings in response to falling incomes and fear of unemployment. But some economists doubt that demand can be falling quite so rapidly. They put at least some of the blame on the seizure of trade finance, mirroring the credit crunch elsewhere in the financial system. If they are right, there could be at least some improvement in demand if western banks can be resuscitated.

Whatever the cause, the underlying truth is that the region is more dependent than ever on external demand. Contrary to analysis proffered by deluded decouplers, 47% of output of Asian economies is now accounted for by exports against less than 37% 10 years ago. Many Asian countries have substituted the dependence on financial flows they suffered a decade ago for dependence on trade flows.

If exporters cannot rely on external foreign demand, then "Asia must save Asia." But how?

China appears to be giving the matter due attention. It is also suffering an external shock, comPounded by the consequences of overly successful efforts at cooling an economy that was rampaging along at 13% only a year ago. By the fourth quarter of last year, growth had fallen back sharply to an annualised 6.8%.

Beijing has changed tack rapidly. It is now promising to spray $586bn through stimulus measures. In response, bank lending surged in the fourth quarter, raising hopes that public funds are seeping into the real economy. Authorities in both Washington and London must be watching enviously. New bank lending has been engineered by the world's most liquid financial institution, the Chinese Communist party. Even retail sales have held up, rising more than 20% last year.

Amazingly, some policymakers in Beijing are now worried that provincial and municipal leaders may use the stimulus package as cover to pour their own money into pet projects. The concern is that, in six months or so, authorities may have the headache of tackling inflation once again. That may be the most optimistic thing anybody has said in months.