Asia's Economic Strength at New High in 2006
2006 was a boom year for Asian economies. The Asian Development Bank projects seven-point-seven percent full-year growth for the developing countries in the region.
The growth was strong enough that economists say the region will quickly shake off the effects of a sudden tumble in most stock markets on December 19. New restrictions in Thailand on foreign investment sparked panic selling that sent the key Stock Exchange of Thailand index down nearly 15 percent.
Other Asian markets sank more modestly on December 19, down one or two percent, and regained some of the lost ground in the next few days.
For most of 2006, the economic focus was on Asia's two growing giants, India and China. China's gross domestic product grew by more than 10 percent in 2006 and India expanded by more than eight percent. Japan, the world's second largest economy, also gave the region a lift with its longest period of recovery since it fell into a slump more than a decade ago. Masahiro Kawai, an economist with the ADB in Manila, says strong global demand for Asian exports fueled the growth.
"[This is] mainly because of the external market expansion on the part of the U.S," he said. "The U.S. growth rate has been high, Europe, also Japan. External environments have been quite good, and domestic demand has also expanded, you know investment [and] consumption, so generally speaking this, has been a very good year." Howard Gorges, vice chairman of South China Brokerage in Hong Kong, says the strong U.S. economy helped drive Asian stock markets to new heights.
Even after the December 19 sell-off, the Hang Seng Index in Hong Kong was up more than 25 percent from a year earlier, and indices in both Mumbai and Jakarta gained more than 50 percent. In the United States, the Dow Jones Industrial Average was up about 16 percent from a year ago.
China's stock markets, which went nowhere for years, boomed in 2006; the Shanghai composite index doubled in value. In large part, initial public share offerings by state-owned companies drove the market. One listing alone - for China's biggest lender, the Industrial and Commercial Bank of China - raised a record $22 billion. Gorges says China has become very popular with foreign fund managers.
"It's the persistent high growth rates, the strength of their foreign exchange reserves, the pressure on them to revalue their currency [that] has brought foreign money," he said. "And indeed, the currency has revalued about five to six percent in the last year or so, and people expect further gradual evaluation. So that's all helped." Even high oil prices did little to stop Asia's gains. Strong exports cushioned the effects of rising energy costs, and tighter monetary policy in most capitals helped stall inflation.
A decade ago, the region was feeling the first rumblings of what would become the Asian economic crisis. By mid-1997, that was in full force: plunging currency values, unsustainable levels of foreign debt and soaring interest rates sank most of Asia into a severe recession. Full recovery came only a few years ago.
The ADB's Kawai says in general, Asian economies are far more resilient than they were a decade ago. "Many Asian countries have accumulated foreign exchange reserves, for example, and they have repaid external debt," he added. "They have been working on banking system restructuring, on banking system reform. They have been working on capital market development. Regional financial cooperation has been strengthened and economic and financial vulnerabilities have been substantially reduced." Many economists think the region is likely to see growth cool slightly over the coming year, largely because an expected slowdown in the U.S. economy will cut demand for exports. Also, China's efforts to rein in its economy are likely to trim regional growth. The ADB forecasts an average growth of seven-point-one percent for developing Asian economies in 2007.
In addition, the credit rating agency Standard & Poor's notes that corporate earnings growth will probably slow and that central banks may tighten money supply or raise interest rates to prevent inflation. That means that Asia's stock markets probably will not rise quite as much in 2007 as they did in 2006. Bank economist Kawai, however, warns that the region cannot continue to rely on export growth, and needs to expand domestic demand.
One problem many Asian countries will face in 2007 is the same one that led the Thai government to restrict investment flows, currencies that are rising against the U.S. dollar. A weaker dollar makes Asian exports more expensive on world markets. The problem is made worse by the fact that China's currency is tightly controlled and has risen in value less than many other currencies, so Chinese goods are more competitive. The ADB's Kawai says China, in particular, needs to encourage households to spend more to fuel growth. Other countries in Asia, Kawai says, need to continue making the economic and regulatory reforms that will encourage domestic and foreign investment.