Bloomberg News

Europe Threat to Asian Exports May Force Slower Rate Rises

June 21, 2011

(Updates with Greece vote in seventh and eighth paragraphs.)

June 22 (Bloomberg) -- Europe’s debt crisis and slowing U.S. growth are damping demand for exports from Asia, giving central banks a reason to slow interest-rate increases even at the risk of seeing inflation undercut domestic spending.

South Korean, Indian and Thai export growth has slowed, reports showed this month. Chinese overseas shipments may stagnate this summer on “weak” U.S. expansion, Credit Suisse Group AG said.

Policy makers may be forced to delay further raising borrowing costs to support their economies, slow currency gains and protect regional exports, which accounted for 35 percent of world shipments in 2009. That could spur inflation, which has accelerated to the fastest pace since 2008 in China, approached 20 percent in Vietnam last month and prompted protests in India.

“If Western economic data continues to deteriorate, there is a risk that Asian central banks shy away from tightening,” said Frederic Neumann, co-head of Asian economic research in Hong Kong at HSBC Holdings Plc. “Ultimately, we believe that will only fuel inflation further.”

The Reserve Bank of Australia, which has held the overnight cash rate target at 4.75 percent after seven increases from October 2009 to November 2010, said it will weigh Europe’s sovereign debt crisis against a forecast pickup in domestic growth and inflation in deciding whether to increase borrowing costs, minutes of its June 7 meeting released yesterday showed.

‘Downside Risks’

“The flow of data over the past month had not added any urgency to the need for an adjustment to policy,” the RBA minutes showed. “Downside risks to the international economy had become a little more prominent.”

Greek Prime Minister George Papandreou won a vote of confidence early this morning, bolstering his new government’s chances of securing further international financial aid.

The leader will try to win parliamentary backing next week for a 78 billion-euro ($112 billion) package of budget cuts to stave off the threat of default. European finance ministers said this week they would hold off on approving a 12 billion-euro payment to the country promised for July until passage of the plans to cut the deficit, sell state assets and impose a “crisis levy” on wages.

Debt Demand

The risk of a sovereign debt default in Greece and slowdown in the U.S. have already bolstered demand for government debt in a sign investors are ratcheting back expectations for higher interest rates.

Australian two-year bonds headed for the longest rally since Lehman Brothers Holdings Inc. collapsed, with yields falling 25 basis points since March 31 to 4.67 percent yesterday as concerns intensified that Europe’s debt crisis will derail the nation’s fastest expansion in a decade. India’s one-year government bonds have rallied, with yields sliding to 8.06 percent yesterday from 8.27 percent on June 13, according to data compiled by Bloomberg.

“If Asian central banks do go on hold, but remain committed to tightening, it would signal better demand for short-term debt,” said Ashish Agrawal, an emerging-market rate strategist at Credit Suisse in Singapore.

China’s more than 10-week pause in raising interest rates is the longest since increases began in October. South Korean central bank board member Kang Myung Hun said June 16 that the pace of the nation’s monetary tightening may need to slow “if the uncertainty deepens” in the global economy.

Region’s Reliance

India’s central bank signaled last week it may slow the most aggressive monetary tightening among Asia’s major economies, saying “the extent of policy action needs to balance the adverse movements in inflation with recent global developments.” It raised the repurchase rate to 7.50 percent from 7.25 percent this month.

The caution reflects the region’s reliance on U.S. and European demand for Asian goods, even as Group of 20 nations push to rebalance the world economy so global growth depends less on such a relationship and more on domestic demand.

Asian economies accounted for 35 percent of world exports in 2009, compared with 25 percent a decade earlier, according to the International Monetary Fund.

Exports accounted for 15 percent of Japan’s gross domestic product in 2010. In South Korea, they are about half of the economy. Overseas shipments account for about 60 percent of Thailand’s GDP, about two-thirds of Taiwan’s economy and about one-fifth of Australia’s.

China Exports

China’s exports may stagnate this summer as the U.S. economy remains “weak,” Tao Dong, Credit Suisse’s chief regional economist for Asia, excluding Japan, said in Hong Kong this week. Thailand’s overseas shipments advanced 17.6 percent in May from a year earlier, down from 24.6 percent in April, while India’s rose 34.4 percent in April compared with 43.9 percent the previous month.

“The big risk here is that they shy away from tightening and allow inflationary pressures to continue to fester and asset bubbles to build,” HSBC’s Neumann said.

China’s retail sales growth slowed to 16.9 percent in May as food costs jumped 12 percent from a year before, eroding the purchasing power of Chinese households. Savings are also being hurt, with the one-year deposit rate of 3.25 percent more than 2 percentage points less than the 5.5 percent annual pace of inflation.

China and the Philippines opted for raising bank-reserve ratios rather than benchmark lending rates this month, signaling the scope for increasing borrowing costs may have shrunk.

The IMF cut its forecast for U.S. growth in 2011 last week for the second time in two months, warning that further setbacks to the recovery pose growing threats to the world economy, along with potential contagion from the European debt crisis.

--With assistance from Paul Panckhurst and Sophie Leung in Hong Kong, Candice Zachariahs in Sydney, Eunkyung Seo in Seoul, Suttinee Yuvejwattana in Bangkok, Chinmei Sung in Taipei, Shamim Adam in Singapore, Lily Nonomiya and Ken McCallum in Tokyo. Editors: Stephanie Phang, Cherian Thomas

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net


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