Crisis marks beginning of end for Asian growth model

By Alan Wheatley - Analysis

BEIJING (Reuters) - The deepest financial crisis since the Great Depression is likely to do more than years of international prodding to wean China and its Asian neighbors off their export-led model of economic growth.

Washington's $700 billion mortgage bailout will reshape the U.S. financial industry, perhaps for a generation or two, in ways that are not yet clear. The fallout for the rest of the world will be far-reaching.

But for Asia, one consequence of the turmoil is already inescapable. After living beyond its means for many years, America will have to rebuild its savings, so consumption will fall. Exports to the United States from China, Taiwan, Hong Kong and now South Korea are already weakening.

The need to take up the slack is urgent.

"I think this is a wake-up call for China," said Stephen Roach, the chairman of Morgan Stanley in Asia.

Roach expects U.S. growth to slow from an average of 3.2 percent over the past 13 years to no more than 2 percent over the next two to three years. Consumption growth is likely to halve to around 2 percent as debt burdens are pared back.

As economic weakness spreads to Europe and Japan, the hit to China's exports could cut its growth rate from around 10 percent now -- already down from 11.9 percent in 2007 -- to about 8 percent, in Roach's view.

"It just underscores the fact that when you have a vibrant but very large export sector, when you have an external shock and you don't have a lot of dynamism on the internal demand side, you have greater risks to growth," he said at the weekend during a meeting of the World Economic Forum in Tianjin, northern China.

POLICY CRANKS UP

Central banks in the region are already responding. Taiwan, China, Australia and New Zealand have all cut interest rates.

Easing monetary policy is all well and good, especially as inflationary risks are receding. Many countries can also afford to resort to fiscal stimulus.

But stoking domestic demand also requires long-haul reforms that sometimes shake the very foundations of an economy -- such as scrapping deterrents to foreign investment in Japan, ending protection for favored groups in Malaysia or subjecting dominant firms to more competition in the Philippines and Hong Kong.

These are politically arduous tasks at the best of times. That's why economists wanted governments to get cracking on them while the going was good.

Countries instead largely shirked the challenge, content to rely on export-led growth by holding down their exchange rates.

Quite apart from hindering the needed rebalancing of the global economy, an undervalued currency acts as a tax on domestic demand, Hong Liang and Yu Song, economists who follow China for Goldman Sachs in Hong Kong, noted in a report.