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Tighter global lending puts brakes on Asian growth

Chinese investor monitors a screen at a Beiging stock brokerage. Even with stocks rising, investors are nervous. Trading volumes in the past month are 14 per cent below the first half of last year.

Ng Han Guan/Associated Press/Ng Han Guan/Associated Press

Asian stocks are rallying on what may prove a pipe dream. Investors expect weakening exports and receding global credit to make for tough going in the first half of the year, but are betting governments will unleash spending and rate cuts in the second half to offset it. The vagaries of politics make that a risky trade. Stocks are cheap for good reason.

Falling commodity prices and rising borrowing costs will take their toll on Asia, the World Bank warned on Jan. 18 , as it lowered its forecast for growth in East Asia and the Pacific to 7.8 per cent from 8.1 per cent. Even with stocks rising, investors are nervous. Trading volumes in the past month are 14 per cent below the first half of last year.

Exports are one concern. Gross exports represent roughly a third of Asia's GDP, and have a wider influence on domestic growth. Yet exports in Asia ex-Japan fell 10.3 per cent in the third quarter compared to the second, according to Goldman Sachs.

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Liquidity is another worry: European banks accounted for more than half of East Asia's foreign debt as of last June. They're likely to continue bleeding out of Asia until Europe's crisis abates. Investors have since demanded higher premiums for lending to Asia, pushing up borrowing costs for companies. Asian central banks might want to cut rates, but doing so could make it even less attractive for foreign investors to lend.

Finally there's the United States, which is being unhelpful for Asia in two ways: Its economy isn't strong enough to revive exports – yet nor is it weak enough that the Federal Reserve is likely to resume the dollar-printing that inundated Asia with cheap money from 2009 until last July.

Asian growth has become increasingly dependent on expanding credit, particularly in China, South Korea and Singapore, according to Goldman Sachs. Tighter global lending could thus lead to a sharper slowdown in Asian growth than many expect. So while stocks markets like Korea, Singapore and Hong Kong might look cheap with prices at below 10 times this year's earnings, risks to growth could justify big discounts.

Wayne Arnold

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