Asia is de-coupling...

A post from Reuters in overnight trading in Asia caught my eye. It proclaimed “Asia faces up to challenges of global crisis." What I found particularly interesting about the post was the fact that the Asians had set up a $120 billion fund through the Asian Development Bank which excluded the International Monetary Fund (IMF) as the go-to organization in a crisis. Reuters says the following:

Asia has been hard hit by the collapse in global demand largely because of the region’s heavy reliance on exports. Singapore, Hong Kong, Taiwan and Japan are in recession and growth elsewhere is the weakest in years.

"Poverty is worsening in many countries. Businesses are struggling. The extremely urgent climate change agenda could be affected," Indonesian President Susilo Bambang Yudhoyono said at the annual meeting of the Asian Development Bank.

"If all this goes unchecked, down the road we could see social and political unrest in many countries," he told representatives of the ADB’s 67-member countries, including finance ministers and central bank governors.

To counter the downturn, the ADB said it will raise lending by half and Asian governments agreed at the weekend to launch a $120 billion fund countries can tap to avert a balance of payments crisis.

You will recall that the Asians were forced to go cap in hand to the IMF for bailout funds after the Asian Crisis in the late 1990s. This experience was very humiliating for some and caused extreme hardship as the IMF programs were rather severe and deflationary. Resentment toward the IMF remains as a result. I see this development as an explicit measure to exclude the IMF in Asia. I am not the only one who noticed this. Marc Chandler the Chief Global Currency Strategist at Brown Brothers Harriman sent out a missive today titled "The Beginnings of an Asian IMF?" saying:

Back in the 1997-1998 Japan proposed an Asian-based IMF, the US objected and the issue seemed to be closed. However, during this crisis, a modified version appears to be in the works and without the international objections.

ASEAN+3 (Japan, China and South Korea) confirmed over the weekend that a $120 bln fx reserve pool will be established by year-end as the Chiang Mai Initiative is expanded. Participating countries can borrow up to 20% of their quote (agreed upon swap ). The other 80% can be accessed only after an IMF-like agreement. At first multilateral agencies, like the IMF and ADB, will be tapped for their expertise, but the intent to be independent is clear. Over time, their own surveillance unit will identify risks and provide oversight.

Separately, Japan offered a $60 yen-swap facility and to guarantee yen-denominated bonds (samurai) issued by developing countries. This is in addition to contributing $38.4 bln to the reserve pool (the same as China–including HK). South Korea will provide $19.2 bln. The four largest economies in ASEAN–Thailand, Indonesia, Malaysia, and Singapore–will each contribute $4.77 bln each, and the Philippines will pony up $3.68 bln.

Now, you should note that the CLSA China Manufacturing Index for April also came out overnight (see Econompic Data’s charts), with the index registering expansion in China for the first time in nine months. The reading was 50.1 in April versus 44.8 March. This indicates that the stimulus efforts of the Chinese government are indeed having the wanted effect on demand as I suggested last week. Therefore, I am officially abandoning my downbeat forecast for Chinese growth (see my predictions for 2009).

Asia looks poised to break away from the West, dare I say de-couple. I am loathe to use that word because the inter-connectedness of the global economy has meant that negative demand-side shocks in the West will be felt in Asia as well. Nevertheless, Asia looks to be developing an Asia-only dynamic and re-focusing on internal trade and politics. This is good for Asia, but, for the West, not so much.



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