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Asia Buckles Under Europe Impact

June 1, 2012

WSJ

By KATHY CHU in Hong Kong, SURABHI SAHU
in Singapore and YUKA HAYASHI in Tokyo

 

Asia is increasingly swaying in headwinds from the European debt crisis, with gains in its stock markets effectively wiped out, its companies struggling to raise financing and growth in both India and China sputtering.

Just recently, all the talk was about taming inflation in the region’s emerging markets. Now, countries are under rising pressure to stimulate their economies just as investors, banks and businesses are moving in the opposite direction, scaling back on lending and new projects, fearing a dramatic turn for the worse in Europe.

In India, gross domestic product grew at the slowest pace in nine years—5.3% in the year’s first three months from a year earlier, well below expectations. While India’s problems are largely self-made, the weakness puts another dent in Asia’s long-running growth story.

Madan Sabnavis, chief economist at Care Ratings, a Mumbai-based credit-ratings agency, said after the India data release that there is “some sense of helplessness. A lot now depends on external factors, and there is no comfort from the way the euro crisis is panning out.”

The European crisis has been hitting Asia since late last year when lending grew tight as European banks pulled back. It has escalated steadily since then. Asian economies are now getting hit in multiple ways including weak trade, volatile markets and a cautious investment climate.

Speaking in Tokyo on Thursday, James Bullard, president of the U.S. Federal Reserve Bank of St. Louis said, “If there was a significant financial meltdown in Europe, it would affect the global economy, not just the U.S. economy. I feel it would have significant impact in Asia.”

The big stock-market declines have raised anxiety for investors and businesses, which are increasingly girding for a downturn. Widespread talk of stimulus in major economies, especially China, is accompanied by worries that such stimulus will be ineffective in the face of a global downturn.

 

As Asian financial markets have wiped out profits from big rallies earlier this year, it has become harder for companies to borrow or tap markets for funds.

On Thursday, Graff Diamonds withdrew its heavily marketed $1 billion IPO in Hong Kong, pushing the total number of IPOs withdrawn in Asia outside Japan this year to 46 valued at $7.7 billion, according to data from Thomson Reuters.

IPOs in Asia are down 68% this year in terms of value, while lending to companies remains tight at European banks, which are big players in Aisa, providing 36% of trade finance, continue to scale back.

Bank loans are a crucial form of financing for small- and medium-size businesses. “We’re in a situation now where a lack of credit is hitting at economic growth and job creation. It could get worse,” said Steven Beck, the Asian Development Bank’s head of trade finance.

Demand for ADB’s trade-finance program, which provides guarantees and loans in 16 Asian markets to cover risks banks are unwilling to take, has soared more than 50% in the year to date from 2011.

That has created more room for alternative lenders such as Capital Business Credit, which supplies financing to U.S. buyers that trade with China and has seen business grow in the tighter credit environment.

Alan Lai, owner of Shiny Garment, a manufacturer of baby clothes in Dongguan, in southern China, is bracing for further pain from Europe. 

While Europe’s troubles have yet to affect his business, Mr. Lai said he is expanding his sales in China in case exports to the West drop. “I do worry about the crisis,” says Mr. Lai. “I want to have some insurance and safety.”

Zuma Press

A chart shows how the weakening euro continues its plunge against the Japanese yen Thursday in the window of a Tokyo stock brokerage.

The effects of Europe’s woes are felt across some of Asia’s most important industries, ranging from shipping to technology to mining. “We’re all very worried about the European situation.…The Indian growth numbers aren’t looking too good either,” Klaus Munk Andersen, group senior vice president and head of Asia operations at Ultrabulk Singapore, a subsidiary of Copenhagen-based Ultrabulk Shipping A/S, said Thursday.

Bulk shippers are being hit on three sides, with tight trade finance, slowing trade and a rising fleet of ships, which is pushing down freight rates.

In Taiwan, local contract makers of electronic devices, ranging from notebook PCs and smartphones, are experiencing order cuts from downstream branded customers like Dell, Lenovo, Nokia as wallets tighten in the West.

Small exporters are suffering from tighter financing, which prompted the government last week to say it will pour more money into a government-backed fund in which exporters could draw credits at a lower costs than from banks.

In Australia, Australia’s giant resources companies such as BHP Billiton, Rio Tinto and Fortescue Metals are for the first time since 2008 beginning to talk about slowing down the pace of their investment in building new mines. Although the latest figures for investment show that about $170 billion is committed to new projects, companies have tempered their rhetoric about pledging more capital as prices for coal and iron ore continue to fall.

“Key project sponsors have complained, in particular, about rising costs—labor and capital—of being strangled by worsening regulation and green tape, of lower commodity prices and slower growth in China,” wrote J.P. Morgan’s chief economist in Australia Stephen Walters in a note Thursday. “These calamities, they argue, risk important projects being delayed or even scrapped.”

Fears of the impact of the European crisis flooded through Asian financial markets on Thursday, ending a dismal month for investors. Hong Kong’s Hang Seng fell 11.7% in May, its worst month since September 2011 and its worst May since 1998.

In Japan, the Nikkei fell 1.1%, pulling it down 10.3% for May, its worst month in two years. Investors seeking havens poured cash into Japanese government debt, pushing the yield on the 10-year bond to 0.810%, its lowest level since July 2003, before the yield fell to finish the day at 0.820%.

A major worry for the region is how much the Chinese economy slows and how powerful the expected stimulus plan will be. Data reports in recent weeks on industrial production, bank lending and manufacturing suggest the slowing has continued into the current quarter.

hinese officials have cited Europe’s woes as one reason for falling foreign direct investment in China. Export growth has also weakened, with Chinese officials saying a “worse-than-expected” economic performance in Europe contributed to disappointing April trade figures.

per troubles in Europe could increase pressure for China to implement more aggressive stimulus measures. But Beijing so far appears reluctant to do so as it continues to grapple with the bank debt and worries about overcapacity that resulted from the massive spending binge that it used to blunt the impact of the 2008 financial crisis.