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No 1997 Asian Crisis Return as China Trembles: Cutting Research

June 27, 2013

No 1997 Asian Crisis Return as China Trembles

The sun sets over buildings in the Kowloon district of Hong Kong. Photographer: Jerome Favre/Bloomberg

Asia’s 1997 financial crisis won’t repeat itself, even as a slowing Chinese economy unnerves the region’s financial markets.

So says Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc. He concluded in a June 25 report that current “differences outweigh the similarities.”

While still predicting Asia is headed for slower growth in coming years, Neumann cited several reasons for expecting the continent to avoid another period of turmoil akin to 16 years ago. Then, countries from Thailand to South Korea were forced to devalue their currencies and were propelled into recession.

Current account positions are now mostly in surplus, which should cushion the blow from an outflow of capital, Neumann said. Banking systems also appear more robust, with better regulatory systems, higher capital buffers and lower loan-to-deposit rates.

There are also no “glaring” mismatches between assets and liabilities, he said. In the 1990s, most external borrowing was in U.S. dollars. By contrast, most of the debt that investors have taken on in recent years is in local currency, so a surge in the dollar won’t impose a spike in debt-service costs.

The region also enjoys much higher foreign exchange reserves than in the 1990s and countries have more power to swap currencies at short notice, giving them firepower to fight currency attacks.

Still, there are new vulnerabilities, said Neumann. Financial volatility complicates the ability to pay debts and bond markets are now bigger than they were. Whereas in the 1990s leverage lay in the hands of businesses, now it’s households, small companies and government entities that bear the most debt.

“On balance the dissimilarities with 1997 outweigh the parallels,” said Hong Kong-based Neumann, a former consultant to the World Bank. “Asia’s defenses are more robust nowadays. Most likely, Asia’s growth has just downshifted to a less spectacular pace.”

* * *

The Federal Reserve, on the other hand, could repeat the past by raising interest rates as early as the summer of 2014 if a recent improvement in the labor market is sustained, according to Deutsche Bank Securities Inc.

Chief U.S. Economist Joseph LaVorgna found that the central bank has almost always lifted its benchmark within one year of when the number of Americans first applying for unemployment benefits averaged 350,000 or less for a quarter. With jobless claims just below that, averaging 345,600 in the quarter so far, the trigger could be reached in a week.

LaVorgna himself doesn’t expect rates to rise until early 2015, because this time the Fed has to first unwind its quantitative easing and see how the markets absorb that. The historical relationship means his rate call might be wrong, as might his prediction that it will take several quarters for the U.S. Treasury 10-year note yield to rise above 3 percent, LaVorgna said in a June 24 report to clients.

Jobless claims data are an “excellent intermediate-term predictor of monetary policy,” especially in the case of higher rates, LaVorgna said. “If past is prologue, whereby low and declining claims accurately foreshadow a noticeable pickup in hiring -- and hence a sharp decline in the unemployment rate -- then monetary policy makers will not be waiting until 2015 before raising the Fed funds rate.”

With the exception of the early 1990s, when it took a year, Fed tightening has always coincided with claims reading 350,000, he said.

When the trigger was reached in the third quarter of 1958, the Federal Funds Target Rate (FDTR) went up to 1.32 percent from 0.94 percent, wrote LaVorgna, a former economist at the Fed Bank of New York. In the third quarter of 1961, claims fell 27,000 to 331,000 and the Fed boosted its key rate to 2.4 percent from 1.68 percent. Similar patterns held true in 1984 and 2004.

* * *

A tennis ball used at Wimbledon travels 50,570 miles (81,370 kilometers) before landing on a racket, when its materials are included.

An analysis of the ball’s supply chain by Warwick Business School associate professor Mark Johnson found it involves flying between 11 countries and across four continents to the manufacturing plant in Bataan in the Philippines before heading to London.

Among the materials used to make a ball are clay from South Carolina, wool from New Zealand, silica from Greece, magnesium carbonate from Japan, rubber from Malaysia and sulfur from South Korea.

The balls are made by Slazenger, a brand of Sports Direct International Plc (SPD), the U.K.’s biggest sporting-goods retailer.

“It shows the global nature of production these days, and in the end, this will be the most cost-effective way of making tennis balls,” Johnson said.

* * *

An inability to do basic mathematics may have helped foster the U.S. subprime mortgage crisis.

In a paper published this week by the Proceedings of the National Academy of Sciences, economists tested the numerical skills, cognitive ability and financial literacy of 399 people who had taken out subprime mortgages from January 2006 to August 2007.

Among the questions asked: “In a sale, a shop is selling all items at half price. Before the sale, a sofa costs $300. How much will it cost in the sale?”

The authors found that those who defaulted were worse at simple math than those who hadn’t, wrote Kristopher Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Lausanne and Stephan Meier of Columbia University.

“Our results indicate possibly large benefits from increased financial education of homeowners,” they said.

* * *

The global economy still has “plenty of room to grow,” according to Goldman Sachs Group Inc. economist Jose Ursua.

He measured output gaps -- the difference between an economy’s actual output and the level at which further growth starts fanning inflation -- for 40 countries.

The results suggested a gap of 2.4 percent between the world economy’s current output and its potential. Developed economies have a 3.4 percent differential and there’s a 1 percent gap in emerging markets, New York-based Ursua said in a June 26 report.

“When the recent bout of market turbulence abates, markets should begin to reflect the view that the world’s ‘room to grow’ is larger than is sometimes perceived, and adapt to a gradual rather than abrupt return to normality,” Ursua said.

* * *

Labor’s share of global income has “significantly declined” since the early 1980s across a majority of countries and industries, according to University of Chicago economists.

The share of income paid to labor has dropped 5 percentage points over the last three decades, estimated Loukas Karabarbounis and Brent Neiman in a paper published this month by the National Bureau of Economic Research in Cambridge, Massachusetts.

Of 56 countries studied, 38 showed downward trends in their labor shares, as did six of 10 major industries.

A decrease in the relative price of investment goods linked to advances in information technology and the computer age induced the shift toward capital, the economists said.

* * *

People may not be happy while they work.

That’s the finding of a study cited in the latest edition of CentrePiece, the magazine of the London-based Centre for Economic Performance at the London School of Economics.

Using smartphone technology, Alex Bryson of the National Institute of Economic and Social Research and the University of Sussex’s George MacKerron were able to tap information on well-being in real time. That differs from previous happiness studies which typically ask people how they feel in retrospect.

They relied on insights from people who downloaded an app that asked them at random times to complete a short survey about how they were feeling. They then were told to pick one of 40 options that best described what they were doing at that moment.

More than 1 million observations from tens of thousands of people showed that paid work ranked lower than any of the 39 other activities with the exception of being sick in a bed. The effect is equivalent to a 7 percent to 8 percent reduction in happiness relative to someone not working.

“People tend to be positive about paid work when reflecting on the meaning and value of their lives,” the CEPR said in a statement accompanying the report. “The analysis of the new ‘Mappiness’ data source indicates that actually engaging in paid work is one of the activities that people least like doing in terms of their immediate feelings of happiness.”

* * *

The International Monetary Fund has become faster in responding to crises since the mid-1980s as policy makers realized local events can have international consequences, according to the Central Bank of Chile.

Focusing on standby arrangements, the main channel of aid, Princeton University’s Ashoka Mody and Diego Saravia of the bank found in a report released this month that the average timeframe between crisis and program shortened from 19 months in the 1977-1986 period to 15 months in the years after 1986.

Their study was based on 300 rescues, 200 of which were associated with turmoil that had occurred in the previous two years. Greater economic and financial stress have accelerated aid programs, while the Latin American debt crisis of the 1980s created more awareness of international spillovers and systemic risks.

“The combination of evidence from different methodologies suggests that this led to faster negotiations of IMF programs after 1986, especially for the more severe crisis or when the crisis country had a fixed exchange rate,” said Mody and Saravia.

* * *

It’s not what Fed chairmen say, it’s the way they say it.

A University of Edinburgh study found the tone adopted by U.S. central bank chiefs has a “small but significant” impact on the price of gold and silver regardless of the policy outlined in the speech. They used gold and silver as proxies for the response of financial markets, according to the report issued June 17.

The research was based on text-analysis software to measure the level of variables such as certainty, optimism and realism in 400 speeches and testimonies from May 1999 to May 2012. They found Alan Greenspan, who led the Fed from 1987 to 2006, was more likely to convey activity and realism in his speeches, while incumbent Ben S. Bernanke is more optimistic.

A 1 percent increase in the amount of certainty in Greenspan’s tone was enough to lift the price of gold by 0.1 percent, said authors Kristjan Thorarinsson and Arman Eshraghi.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

The sun sets over buildings in the Kowloon district of Hong Kong. Photographer: Jerome Favre/Bloomberg June 26 (Bloomberg) -- Cliff Tan, East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in Hong Kong, talks about China's central bank monetary policy and the nation's credit market. He speaks with Angie Lau and Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg) June 26 (Bloomberg) -- Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, talks about People's Bank of China monetary policy and its implications for the nation's credit market. China’s central bank said it will use tools to safeguard stability in money markets and tight liquidity is set to ease, giving the first official signs of relief for a cash squeeze in the world’s second-largest economy. Green speaks from Shanghai with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg) June 25 (Bloomberg) -- Robert Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings Inc. in Hong Kong, talks about the challenges facing China's economic growth. Subbaraman also discusses People's Bank of China monetary policy and the nation's credit outlook. He speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

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