Betting on Asia

By Henrique Schneider

What is BRIC? In the pre-recession world, Brazil, Russia, India and China (sometimes even BRICS, including South Africa) have a good story to tell.

These giants woke up from their slumber and presented nothing but splendid growth and seemingly unconditional economic opportunities.

The storyline was like this: big, young economies with a critical group of well-educated people pushing for market-friendly reforms; countries relying on their mass and scaling-potential being self-sufficient in natural resources; economic growth paired with a rise in productivity, in education and financial stabilization were bound to never seen success.

In a post-crisis world, the perspective is different. Yes, Brazil still is self-sufficient in resources but its financial markets were severely hit by the turmoil. Output is still growing but productivity stagnates at best.

Russia faces serious trouble after having made the natural resources industry its sole economic base and bullying internationally like a spoiled child.

India has all the problems it had before the crisis, just aggravated and South Africa still struggles with stability, economic downturn and inflation. Within the highly heterogeneous BRIC, China may be the sole remaining success story.

On the other hand, how can an export-oriented economy as China be the winner of a global downturn? The answer is relatively simple but requires a change in perspective.

Economic success is not achieved by individual countries (failures are caused in individual countries), but by the country's relative position in an international network.

Beijing needs its neighbors to grow. It is Korea's economic and technologic edge, as well as Vietnam's manufacturing basis that influence China's economy in its search for scale, upgrade and comparative advantage.

Australia's resources and logistics paired with Taiwanese and Singapore investment fuel and maintain the mainland's course.

Let the numbers speak for themselves: While the United States and Europe are expected to see a growth of meager 3 and 1.5 percent, respectively, in their gross domestic product (GDP) this year, Asia is set to surge 8 percent on average in 2010 or at least 6 percent in 2011.

Not surprisingly, the rebound will be led by China (10 percent) followed by Taiwan (7 percent) and Vietnam (7.5 percent). The continents' advanced economies are on their own on a good path: Korea should grow by 5 percent in 2010 and Singapore by 4.5 percent.

Capital Economics, a macroeconomics research consultancy, pins the rise in internal demand as well as in regional trade as the main drivers of this growth.

Throughout the crisis, household spending has held up well in China and its neighbors, thanks to the tax breaks and some credit increase, rapidly expanding private consumption.

With consumption, investment could also be attracted. The good news about this is that the process has been regional with positive consequences for all countries involved. Instead of searching for glory in a loosely distributed BRIC, which lacks common economic basis and networks, look out for Asia.

Of course, there are caveats. The big risks are a possible downturn in trade over the course of the year if regional demand flags (which could hurt Korea and China) and overheated asset bubbles caused by easy credit.

There is also some questions as to whether countries in which debt demand remains high (once again, Korea) will be able to sustain domestic consumption. The biggest threat, however, is inflation.

Still, many of Asia's governments are moving to contain inflation and rein in lending. And ― this has to be noted ― government debt levels throughout the region may be at record highs but are still way lower and thus more manageable than in the West.

At the same time, banking systems are in better shape. This all means that you can still bet on Asia. For the next century? There is no way of knowing that. But for the years to come, the Pacific-Asia region may be the best asset in the macroeconomic basket.

Henrique Schneider is a traveler in Asia as well as a political analyst. He works as a consultant and analyst in Vienna, Austria, and publishes regularly in German and English on economic and security issues related to China and other Asian countries. He can be reached at hschneider@gmx.ch.