Economic analysis by Keith Rankin.
On 30 September I published a chart showing twenty-year averages of the private-sector and public-sector financial balances in a wide range of countries (Spread of Financial Balances by Country, 1995-2014).
This week’s chart focuses on the Asian region, and shows structural differences between these countries and New Zealand in particular and much of the rest of the world in general. (Note that the New Zealand figure in particular has moved slightly due to an upgrade of the IMF data, published in October.)
We see that all the Asian countries appear in the right-half – in Quadrants 1 and 2 – which means that they have private sectors which spend (including spending on new investment goods such as factories and equipment) less than they earn. Offsetting that, most have persistent government deficits; this means that the main intersectoral financial flow in these countries is from the private sector to the government sector. However, with the weight of Asia to the right of the dashed line, it also means there is a substantial net flow from Asia’s private sector to Asia’s foreign sector, meaning to countries like New Zealand operating well to the left of the dashed line. This is strongly consistent with a pattern of Asian money flowing to – and seeking returns in – western countries, and non-Asian emerging economies in Africa, Latin America and Eastern Europe.
On 14 November The Economist published a feature article Pulled Back In about private debt in emerging economies. The article identifies Singapore, Malaysia, China, Korea and Thailand as all having significant and growing private sector debt. Not included in the article, but almost certainly up there, will be Taiwan and Hong Kong.
This finding seems completely inconsistent with the financial balances data plotted in the chart. These countries are all substantial creditor countries, in that they save and lend to or otherwise purchase financial assets in the ‘debtor’ countries to the left of the dashed line. Yet they are identified as having among the highest rates of private debt in the world. The Economist says: “The classic sort of emerging market has a current-account deficit and is prone to inflation…. The other kind, too new to feature in textbooks [my emphasis] on emerging market crises, has a hearty current-account surplus, huge foreign-exchange reserves and decent public finances – but lots of private debt and an excess of goods-producing capacity, leaving it prone to deflation”.
What it means is that financial institutions (especially banks) in these Asian countries are lending massive amounts to their own people, who are in turn buying financial assets in other parts of the world. Of particular significance as global ‘investors’ is Singapore and Malaysia, both countries with many people with “Chinese-sounding names” (see my What’s in a Name?). In London, one famous Malaysian project is the redevelopment of Battersea Power Station (Battersea – the pride of Britain and Malaysia, The Star Online, 25 July 2015).
The juxtaposition of this week’s chart and The Economist chart (“Big and Bigger”, in the cited article) tells us that, on a large scale, people in Singapore, Malaysia and China (and almost certainly Taiwan) have been borrowing money from their own banks and buying existing and refurbished assets in countries like New Zealand. This is nothing new. It’s a pattern going back to the beginning of the century (noting that Malaysia at least changed its financial behaviour dramatically – from global debtor to global creditor – after the 1998 Asian crisis).
This is leveraged speculation; it’s not a simple case of finding outlets for savings. It means that many quite rich people are getting heavily into debt in order to buy foreign assets that they believe will substantially appreciate in value. It means that the next big financial crisis will most likely start as an East Asian banking crisis. Leveraged speculation can make spectacular financial gains. And spectacular losses.