THE CHANGING ECOMOMIC DYNAMICS IN ASIA

WHAT ASIA'S NEW GROWTH TACK MEANS FOR INVESTORS

Asia has been a driving force behind global growth since the financial crisis. But the dynamics are changing as growth slows in China and Australia, and Japan pursues “hyperactive” monetary policy. In this issue of our Secular Outlook Series, portfolio managers Ramin Toloui, Tomoya Masanao and Robert Mead discuss how these developments are affecting the global outlook for the next three to five years and the implications for investors.

PIMCO

Business Spectator, June 13, 2013

Question: What is PIMCO’s secular outlook for Asia?

Ramin Toloui: Asia has been the critical driver of the global economy during the past five years, providing by far the largest contribution to global GDP growth of any region. China has been at the centre of Asia’s growth story, so the most important question for Asia’s secular outlook is: Can China maintain high rates of economic growth in the years ahead?

Our view is that Chinese GDP growth will downshift, averaging 6 per cent to 7.5 per cent annually for the next five years versus more than 9 per cent on average for the past five. The reason is that the previous engines of Chinese growth – net exports and investment – are reaching their limits. Prospects for export-led growth are inhibited by China’s large size in a global marketplace that remains deficient in aggregate demand due to high indebtedness in the developed world. Investment cannot play its previous role in driving growth because it has already risen to almost 50 per cent of GDP – up from 35 per cent in 2000 and from 42 per cent in 2007 before the global financial crisis – an extraordinary ratio by historical standards.

To sustain growth, China’s economy needs to shift to greater reliance on household demand. The good news is that the potential is extraordinary after more than a decade in which consumption has declined from 46 per cent to 35 per cent of GDP. Latent demand for not only consumer goods but also services such as health care is likely enormous. However, turning that potential into reality requires changes in economic policy that are wide-ranging and difficult, and also challenge vested interests among the political and industrial elite.

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