© The Economist Intelligence Unit Limited 2015 Contents 2 3 4 5 6 8 9 Then and now The elephant in the room: India A regional trading hub The ASEAN economic community Development of capi
Trang 1A report by The Economist Intelligence Unit
1995 to 2015
Commissioned by
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Contents
2 3 4 5 6 8 9
Then and now
The elephant in the room: India
A regional trading hub
The ASEAN economic community
Development of capital markets
Asia’s magnetic middle class
From the world’s factory to the world’s mall: the digital future of retail in Asia
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Then and now
1
The everyday sensory experience of Asia’s emerging cities over the past two decades has been a combination of the constant noise and upwards growth of a vast building site, and the buzz created by young people in pursuit of unprecedented opportunities for education, economic activity and social freedom
In 1995, if a Western student hoped to have
a business career in Asia, they were probably taking classes in Japanese—the language of the economic powerhouse of Asia China had yet to join the World Trade Organisation and its international relations were still reeling from the Tiananmen Square crackdown of 1989 India had only recently shed its notorious “Licence Raj”
system, a hotbed of bureaucratic corruption, which had sprung out of that country’s severe approach to central planning As Indonesia’s authoritarian president, Suharto, prepared to celebrate 30 years of his New Order, citizens across East and South-east Asia were starting
to tire of the heavy-handed regimes—whether
of communist or nationalist origin—that had
emerged in the process of decolonisation, and were looking for more liberal, pluralistic systems
As a confident middle class emerged on the back
of export-oriented industrialisation, winds of change were blowing from Mongolia and South Korea in the north to Thailand and Indonesia in the south, destined to be whipped up further by the 1997-1998 Asian financial crisis
Twenty years on, a Westerner circulating at
a conference in Shanghai and conversing in fluent Mandarin is not unusual enough to turn heads China has leap-frogged Japan in terms of economic output shifting the centre of gravity
of global trade in the process China has become one of the world’s most sought-after markets, with interest also growing in the nearby bloc
of fast-developing economies known as the Association of South-East Asian Nations (ASEAN) These, along with the developed Asian economies
of Japan, South Korea, Hong Kong, Taiwan and Singapore, form a dynamic and increasingly integrated trading network—and a vital hub within global supply chains
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During its 1991 balance-of-payments crisis,
India’s government flew the country’s entire gold
reserves to Europe as collateral—and committed
to a reform programme—in exchange for an IMF
bail-out The resulting changes led to a decade of
optimism about India’s growth prospects, but in
2013 another balance-of-payments crisis loomed
large as the rupee plummeted against the US
dollar and the cost of importing foreign oil once
again threatened economic stability This shock
prompted a re-examination of India’s economic
fundamentals
India still faces many of the same challenges
as in the early 1990s: energy shortages, an
inefficient state-run banking sector, a narrow tax
base, tensions between its diverse communities,
regional insurgencies, endemic poverty and
corruption and inadequate access to education
However, the size of its economy has also more
than quadrupled over the past 20 years, and the
Reserve Bank of India (the central bank) has
accumulated a healthy stash of foreign-exchange
reserves This puts India in a better position
to cope with unexpected external shocks, and
the country’s youthful population and broadly
positive trajectory are causes for optimism Yet,
even with the current reform-minded prime
minister, Narendra Modi, at the helm, India’s
economic future remains uncertain
India’s development path is often compared—
unfavourably—to that of China In the early
1990s both countries faced the challenge of
lifting hundreds of millions of their citizens
out of poverty, but only China has come close
The elephant in the room: India
2
to eradicating this problem in the years since When drawing contrasts between China and India, two features stand out: their governance and their economic structure The ruling Chinese Communist Party has linked its political legitimacy to economic growth and social stability, and the careers of party cadres have long hinged on their ability to hit growth targets This has provided an incentive for rapid development—often at a high cost to civil rights and the environment India, meanwhile, is a participatory democracy whose socialist roots are proving more resilient Illegal land grabs for development cannot easily be swept under the rug—although the flipside of this is that even more reasonable efforts at acquiring land tend
to be strenuously resisted As a result of these differences in governance, the two countries’
economic structures have diverged
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The past two decades have seen Asia’s emerging markets grab a larger and larger share of world trade, with China overtaking the US as the biggest trader in 2013.1 The East Asian trading hub has gained a unique status in global value chains: whereas the NAFTA and EU manufacturing hubs largely serve their own regions, East Asia supplies the entire globe.2 This remarkable success owes in no small part to the intra-regional trading dynamic that has emerged, in the so-called flying geese formation
Manufacturers in the first economy in this formation, Japan, recognised the benefits of outsourcing labour-intensive parts of their supply chains to cheaper locations as far back
as the 1960s, and the recipient “Asian tiger”
economies of Hong Kong, Singapore, South Korea and Taiwan demonstrated during the 1970s and 1980s that it was possible to move up the value chain at an eye-watering rate from this
A regional trading hub
3
starting point Over the past 20 years China and the ASEAN economies have sought to emulate these achievements, vying to position themselves
as the most investment-friendly environments in the next wave of outsourcing
The result of this highly complementary trading network has been a vertiginous rise in the value
of East and South-east Asian intra-regional trade (see chart below) The value of total trade more than quadrupled between 1995 and 2014 The share of the region’s total trade, which is intra-regional, has not changed significantly since
1995, and has even declined slightly since 2009
At 45%, it is well below the EU’s level of intra-regional trade, which stands at 65%.3
A question mark remains with regard to whether Asia’s less-developed economies will be able
to join the flying geese formation with the same degree of success as the Asian tigers and
Rise in value and share of Asian (ASEAN+3) intraregional trade, 1995-2014
Source: ADB Asia Regional Integration Centre; IMF Direction of Trade Statistics.
0 1,000 2,000 3,000 4,000 5,000 6,000
38 40 42 44 46 48
50 Trade share (%); right scale Total trade; (US$ bn) left scale
14 13 12 11 10 09 08 07 06 05 04 03 02 01 2000 99 98 97 96 1995
1 World Trade Organisation
(2014), ‘World trade report
2014’ China’s share of the
world’s exports and imports
reached 11% in 2013,
compared with the US’s
10.4%.
2 Lejour, A.,
Rojas-Romagosa, H and
Veenendaal, P (2014)
‘Identifying hubs and
spokes in global supply
chains using redirected
trade in value added’
European Central Bank,
Working Paper No 1670,
April 2014.
3 IMF Directions of Trade
Statistics; ADB Asia
Regional Integration Cente
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China Two main factors are contributing to the
“stickiness” of China as a manufacturing location
First, China’s size and potential as a consumer
market mean that producers are keen to be there,
developing and distributing products tailored to local
consumers—and at the velocity required to maintain
competitiveness Second, the Chinese government
is going to great pains to future-proof the country’s
industrial base by promoting automation on a grand
scale If it succeeds, many low-skilled manufacturing
jobs may well go to robots, rather than workers in
Myanmar or Laos—though this will only apply to
certain industries
ASEAN’s response is to increase its value proposition
through further economic integration The ASEAN
Economic Community is being established with a view
to creating a single market that encourages trade by
lowering barriers, and is large enough to divert the
attention of global investors away from neighbouring
behemoths China and India
The vision
l Investors no longer face non-tariff barriers
l Standards are harmonised
l Tax regimes are co-ordinated
l Skilled labour can move around freely
The ASEAN economic community
Population
(US$ bn at PPP)
Source: The Economist Intelligence Unit.
0
200
400
600
800
1,000
1,200
1,400
1,600
2019
2014
ASEAN India
China
0 5,000 10,000 15,000 20,000 25,000 30,000
2019 2014
ASEAN India
China
The potential: ASEAN as a single market
ly
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Stockmarkets have become an important source
of capital for the 22,000 firms currently listed in the Asia-Pacific region (excluding Australia and New Zealand) Equity market capitalisation has roughly trebled since 1995 and now stands at over US$22trn—well ahead of the EMEA region, at US$12trn, although still trailing the Americas at US$30trn.4
However, Asia’s financial markets are far from having reached their potential Room for growth can be seen in the relatively low level of market capitalisation as a proportion of GDP (see first chart below), and in the lack of diversity of financial instruments in use (see second chart below) Progress has been made in these areas, particularly since the Asian financial crisis demonstrated the danger of concentrating risks
in a bank-based financial system,5 but certain
Development of capital markets
4
asset classes such as corporate bonds are still not widely used
Another indication of the lack of maturity of Asia’s financial systems is the very limited presence of foreign firms Singapore is a notable exception, with 37% of the firms hosted on its stock exchange being foreign However, not a single foreign firm is listed in mainland China
or Indonesia, while just one is listed on each of India’s main exchanges
Holding back participation and investment
in emerging Asia’s financial sector is a perception—not entirely unjustified—that the region’s markets function in a somewhat opaque and idiosyncratic manner Recent research has shown that the pricing of Asian stocks is less well correlated to economic and corporate fundamentals than that of their G7
Emerging Asia's financial markets: Plenty of room for growth
(Debt and equities as % of GDP, 2Q 2012)
Source: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute Analysis.
0 100 200 300 400 500
0 100 200 300 400 500
India Other emerging Asia
China Advanced economies
4 Data from World
Federation of Exchanges,
March 2015 Equity market
capitalisation of the
Asia-Pacific region (excluding
Australia and New Zealand)
in 1995 was US$7.7trn
The data for the Americas
includes North, Central and
South America.
5 Singh, S (2011) ‘Financial
market depth: friend or foe
when it comes to effective
management of monetary
policy and capital flows?’
in The influence of external
factors on monetary policy
frameworks and operations,
Bank for International
Settlements, 2011, vol 57,
pp 231-237.
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counterparts.6 In other words, Asian stock prices
are less predictable
Better market regulation, including more
stringent requirements for transparent corporate
governance, tends to improve the accuracy
of pricing and therefore lessen the impact of
speculation on markets The urgent need for
such regulatory improvements has been well
illustrated by China between mid-2014 and the
summer of 2015 (see chart below) A bull run
that added US$6.5trn to the value of Chinese
stocks over the course of a year was entirely
disconnected from trends in the real economy In
June 2015 the bubble burst spectacularly, leading
the Chinese government to take extraordinary
intervention measures in July in an attempt to
restore stability to the market
Besides improving regulation and transparency,
received wisdom holds that financial
diversification is key to reducing risk in a financial
system However, valid questions have recently been raised about the risks of overly rapid financial market diversification and deepening,
as policymakers seek to learn the lessons of the 2008-09 global financial crisis—which after all broke out in the world’s most highly developed financial markets.7 During the last few years, quantitative easing by central banks in the West has caused investors to chase higher returns in Asia’s emerging markets, pushing up domestic debt levels and housing prices Yet as the
mid-2013 “taper tantrum” showed, when it looks like quantitative easing will be curtailed, investors are quick to pull their money out of higher-risk emerging-market locations
Policymakers in Asia’s emerging markets therefore face the challenge of balancing development and opening up their financial systems against the need for stability, and many will understandably wish to proceed at a measured pace
China's GDP and stockmarket: a tenuous relationship
Source: The EIU; Yahoo Finance.
0
2
4
6
8
10
12
14
16
Real GDP (% change on previous year); left scale
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 CSI 300 index; right scale
15 14 13 12 11 10 09 08 07 06
2005
6 Lipinsky, F and Ong,
Li Lian (2014) ‘Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?’ IMF Working Paper, February 2014.
7 See for instance Sahay,R., Čihák, M et al (2015)
‘Rethinking Financial Deepening: Stability and Growth in Emerging Markets’, IMF Staff Discussion Note 15/08.
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Asia is urbanising at an alarming rate, and mega-cities are becoming the new norm The emergence
of an affluent urban middle class has led producers in the region to alter their strategies from producing for export to focusing on local consumers Multinationals are increasingly establishing their product development, marketing and distribution functions in Asian emerging markets, in order to tailor products to local demand
The rise of the Asian middle class will also introduce new social and commercial pressures
As people become wealthier, they also become more discerning consumers with regard to quality, safety and ethics Widespread outrage about tainted infant milk powder and other scandals in China have already forced changes
in regulations and business strategies, with some Chinese food companies partnering with
or acquiring Western competitors to build trust In future, better-networked and more environmentally and socially conscious urban consumers in Asia will impact not just the types of products and services on offer, but how these are produced and delivered
Asia’s magnetic middle class
5
Consumer power in emerging Asia will equal that of Western Europe by 2019
(% of world total)
Source: The Economist Intelligence Unit.
0 5 10 15 20 25 30 35 40
0 5 10 15 20 25 30 35 40 Western Europe
US China, India and ASEAN Four
19 18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 2000 99 98 97 96 1995
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Asia is redefining retail for the 21st century In
towns that have yet to build a modern shopping
mall, street markets are giving way to e-, m- and
s-commerce as local firms create digital platforms
adapted to peculiarly local conditions India’s
digital commerce market enjoyed average annual
growth of 35% between 2010 and 2014, although
with predicted sales of US$15bn in 20158 it still
lags far behind China, which had surpassed
US$300bn by 2013
Indian firms are eager to emulate the success
of China’s Alibaba, whose IPO in the US last
year smashed global records A challenge for
contenders is how to handle payments, with
consumer trust sorely lacking, debit- and
credit-card usage low and a clunky banking
system Snapdeal, one of India’s leading digital
commerce firms, has followed the lead of China’s
Taobao in launching its own secure payment
service, TrustPay A more basic response by
most e-retailers has been to offer a cash-on-delivery option, accounting for around one-half
of transactions In a smart domestic innovation, Indian firms have also come to rely on networks
of local couriers to overcome logistical problems and reduce delivery costs
What is remarkable is how fast online retail is growing in Asia’s emerging markets (albeit often from a very low base)—despite lagging physical infrastructure and financial services According
to the 2013 ICT Development Index produced
by the ITU, a UN agency focused on information and communication technology (ICT), China scored 5.1 and India just 3.1 out of ten for access
to ICT, compared with the UK’s score of 9.2 The experience of Asia’s e-retail pioneers—pushing ahead while they wait for policies and systems to catch up—demonstrates that where there’s a will, there really is a way
From the world’s factory to the world’s mall: the digital future of retail in Asia
6
8 Internet and Mobile Association of India (2014), 'IAMAI Digital commerce report 2014.'