Economy

Asia and Europe Discuss Economic Crises

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As the threat of global economic fallout looms nearer, Asian and European leaders meet to discuss their options.

The meetings, which began in Bangkok this week, come as Asia’s economies begin to buckle under strains from the European debt crisis. Previously viewed as the strong points in a global crisis, the region’s concerns are deepening.

“With the ongoing economic difficulties of some countries in the Eurozone, I believe that our cooperation is even more crucial than ever,” said Kittiratt Na-Ranong, the Thai Finance Minister.

“Because Asia and Europe are closely knitted in terms of international trade and investment, one spark of crisis could cause turmoil in the other side of the world,” he continued.

Europe is dealing with internal arguments as well, amid talks of whether austerity or pro-growth measures will solve the region’s problems. According to a statement from Host Thailand, officials “expect that the European economy will gradually recover from the current crisis.”

Many agreed that the only solution demands that Europe pursue “growth-friendly fiscal consolidation as well as growth enhanced policies and further structural reforms. Ministers stressed the role of emerging economies in the global effort by further strengthening private consumption and implementing structural reforms to help boost domestic demand and growth.”

Asset Managers Flock to Singapore and Asia

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The recent capital flow to Asia is pushing leading asset managers to hire analysts and bond traders in the region.

BlackRock Inc., for example, has made Singapore its home base for trading regional debt and currencies. Manulife Asset Management, Aberdeen Asset Management and Western Asset Management have also made plans to expand their staff and focus in the region.

BlackRock Asia-Pacific chairman Mark McCombe explained:

“Quite recently, our Asian fixed-income capability was quite underdeveloped and so the decision was made to try to build a world-class capability. The regulatory framework, the living and working environment as well as the kind of rich base of investors make Singapore a very attractive place to do business.”

 

Asian Investors Increase Caution as Economies Falter

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Asia’s leading investors are continuing to pull back on their riskier assets as global economic concerns worsen.

Sovereign wealth funds and institutional investors, with control of more than $1 trillion, have minimized investments in both stocks and bonds and begun boosting their cash resources.

According to Barry Bosworth of the Brooklyn Institution, the change “reflects a growing perception that the problems in Europe and the U.S. will not be resolved any time soon. The risks of a large negative event are too large.”

According to MB.com.ph, BlackRock’s Terrence Keeley said “officials at sovereign-wealth funds are nervous about the outcome of the presidential election in November and its impact on future budget negotiations” as well. Other factors boosting investor concerns include the upcoming power change in China and stunted growth.

Ng Kok Song, Chief Investment Officer of GIC added: “Due to heightened uncertainty in global markets, we allowed the cash inflow from investment income and fund injection to accumulate during the year in preparation for better investment opportunities.”

Keeley explained that sovereign wealth funds are under the impression that “there will be a number of strategic opportunities that they would be best prepared to exploit with cash on hand.”

China’s Economy Weakens as Global Crisis Lingers

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China’s slowdown in manufacturing activity and other vulnerabilities throughout Asia have weakened the region in the face of the European crisis. Its position as the stronghold against Europe’s devastating situation and the U.S.’s disappointing recovery is fading away.

Pascal Lamy of the World Trade Organization said Asia is becoming more and more “interconnected with the rest of the planet and I don’t think this relative immunity will be forever.

“I would expect, given what is happening in other parts of the world economy, this region to be more affected than it has been so far,” he continued.

And reality is confirming his suspicions at rapid speeds. Individuals and organizations are calling on the nations’ governments to boost their economies before the global situation worsens.

“China’s economic slowdown is more severe than expected. Export orders are continuing to fall, which is definitely related to Europe’s debt crisis,” said Citic Bank International Hong Kong’s Liao Qun. “Uncertainty in Europe is high. China needs to move faster and more aggressively to speed up loosening of its monetary and fiscal policies.”

 

Lenovo Catches Up to HP

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Lenovo Group has revealed that the gap in market share between Hewlett-Packard and the other Chinese company has been reduced to 2 percent, a significant difference from 2010’s 9 percent.

International Data Corp reports that Lenovo reached record sales in the third quarter of last year, as well as a global market share of 14 percent. These developments make the company one of the greatest PC makers by market share.

Lenovo claims its success is linked to its smartphone market.

“We saw strong progress in our Mobile Internet business. During the (third) quarter, Lenovo sold more than 6.5 million phones, and almost half of those were smartphones. Lenovo’s share of the Chinese smartphone market reached double digits in December,” said Lenovo chairman and CEO Yang Yuanqing.

In 2005, Lenovo acquired the US PC division of IBM, and last year it signed on a joint venture with NEC Corp as well.

“For the first time, Lenovo has become the global number one vendor of commercial PCs and consumer desktops, despite the worldwide shortage of hard drives in the past quarter,” Yang continued.

“Because Lenovo maintains a high volume of PC shipments, it has stronger bargaining power with hard drive providers than other companies,” added Wag Jiping of IDC Asia-Pacific.

Businesses See Potential in Chinese Markets

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As markets remain shaky around the world, foreign businesses have begun to see the potentials of China’s market. As a result, foreign firms are launching China-focused products and brands in hopes of wooing the nation. Apple’s “Designed in California, Made in China” T-shirt is a perfect example. When a new store opened in Shanghai, they changed the slogan to “Designed in California, Made for China.”

“This Made-for-China phenomenon is just one of the many sub-trends spawned by the macro trend of economic and consumption power shifting toward emerging markets,” a report from Trendwatching.com said.

Lu Haiqing of Tesco China called China the “last untapped market on Earth.” He added that “any wise and rational enterprise will have no choice but to come to China, no matter if they like it or not.”

Tesco endeavored into the Chinese market in 2004, and has since opened more than one hundred outlets. “More than 4 million Chinese consumers shop at Tesco China every week and the trend of trade-up is obvious,” Lu said.

Still, despite the positive sides to the market, cashing is a real difficulty.

“The Chinese market is vast and unique. It’s so special that merely dumping an existing management scheme, which succeeds elsewhere, is doomed to fail here,’ Lu said.

Asian Investment Increases 150% in London Office Market

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According to Jones Lang LaSalle, Asian investment into the London office market has increased 150% since 2010. In 2011, Asian investors were responsible for $2.2 billion of $13.9 billion in transactions in the investment market of Central London. Asian economy is on the rise despite lessening demand in Europe, as well as the festering debt crisis. Real estate industries in the region, however, are passing muster.

Jones Lang LaSalle’s International Capital Group’s Alistair Meadows said “During 2011 we have seen Asian investment into London more than double. What has been evident is the emergence of ‘new’ sources of Asian capital attracted to London ranging from pension funds like EPF & PNB from Malaysia to Ultra High Net Worth (UHNW) investors like Khoon Hong Kuok and Martua Sitorus who acquired ‘Aviva Tower’ in the City of London for 288 million euro, advised by LaSalle.

“Asian buyers were especially dominant in the City of London office market, accounting for 23 percent of annual investment volumes. Indeed, of the 3.5 billion euro traded in the City office market last year is many sizes over 100 million euro. 40% was undertaken by Asian buyers. We predict seeing a diverse range of Asian investors being very active in London in 2012 and likely to account for over 20 percent of investment volumes by year end.”

Andrew Hawkin, also from LaSalle, added: “Over the next 12 months Asian money will also continue to target the City for higher income returns, and the West Ed for long-term wealth preservation, reinforcing London’s perception as a safe haven. Already in 2012 Malaysian capital is rumored to have placed the majority of a major German portfolio under offer in the City. London’s transparency, relatively long leases and high yield spread above the risk free rate, continues to be attractive to Asian Capital seeking to diversify away from their home markets.” He noted that the trend is likely to be long-lasting.

Trade Financing in Asia

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The Asian Development Bank is expecting a sudden increase in demand for trade financing as European banks limit their lending in the face of the ongoing crisis.

“The trade-finance program is filling persistent market gaps, but it will become even more important,” said Steve beck of ADB. “With some major European banks retrenching from the trade-finance business, we see that the gaps are increasing.”

Beck predicts even more growth in the operation, which is already worth $3 billion. A credit crunch will most affect smaller emerging markets such as Bangladesh, Sri Lanka and Vietnam. There is risk for a collapse similar to that of 2008, which will inhibit growth across the continent and add to the global recession.

Now, European banks are scrambling to raise their capital ratios, and Morgan Stanley estimated that many lenders would lower their leverage by $2 trillion to $3 trillion.

“European banks that had exposure in Asia have had to repatriate some of the money from Asia, and that’s why you see volatility” in the area’s exchange rates, explained Iwan Azis, also of ADB.

IATA Lowers Profit Expectations for 2012

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IATA has lowered its profit expectations from its global airline earnings in 2012 to $3.5 billion, 28.6% less than its last prediction, stating its concerns of a net loss of $8.3 billion if the Eurozone crisis continues to worsen and global GDO growth falls.

IATA’s previous forecast was released in September, in which they revealed their expectations of a $4.9 billion profit next year. The airline industry leaders represents more than 200 airlines around the world, including Asia, Europe and the Americas.

“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion- the largest since the 2008 financial crisis,” said Tony Tyler of IATA.

“This admittedly worst-case- but by no means unimaginable- scenario should serve as a wake up call to governments around the world,” he continued. “Government policies need to recognize aviation’s vital contribution to the health of the economy.”

He added that even the best case scenario for next year “is for a new margin of just 0.6% on revenues of $618 billion. But the industry is really moving at two speeds, with highly taxed European carriers headed into the red.”