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| The Limbo of Asian Markets | |
| (about 9 hours later) | |
| SURABAYA, Indonesia — The docks at big Indonesian ports like this one are quieter these days, as China’s demand for raw materials has begun to cool. | SURABAYA, Indonesia — The docks at big Indonesian ports like this one are quieter these days, as China’s demand for raw materials has begun to cool. |
| But drive an hour inland and the agricultural giant Cargill is racing to finish a cocoa-bean processing plant, while a large instant-noodle factory is running full tilt to meet the demand for convenience food from Indonesia’s large and growing middle class. “We’re having quite a tough time keeping up,” said Tjun Sulestio, a general manager of the noodle factory, run by PT. Suprama. | |
| The contrast in many emerging markets between signs of a looming currency crisis and strong domestic demand is visible around the world. Stock markets and currencies have fallen in recent months in places like Buenos Aires; Jakarta, Indonesia; Manila, and Istanbul, as investors have worried that weaker Chinese growth and a United States Federal Reserve that is pumping out fewer dollars will cause a global stumble in many developing nations. | |
| Like limbo dancers struggling to shuffle under a low bar before standing upright again, emerging markets must shuffle along under weak commodity exports and capital outflows before they can recover their balance and let strong domestic demand for products like cars, electronics and instant noodles carry their economies forward again. The question is whether their consumers and businesses will continue to spend, or whether international troubles will spill into domestic economies in ways they cannot control. | Like limbo dancers struggling to shuffle under a low bar before standing upright again, emerging markets must shuffle along under weak commodity exports and capital outflows before they can recover their balance and let strong domestic demand for products like cars, electronics and instant noodles carry their economies forward again. The question is whether their consumers and businesses will continue to spend, or whether international troubles will spill into domestic economies in ways they cannot control. |
| “We don’t want that bar to go too low,” said Jakob F. Sorensen, the chairman of the European Business Chamber of Commerce in Indonesia. “The lower it goes, the harder it will be.” | “We don’t want that bar to go too low,” said Jakob F. Sorensen, the chairman of the European Business Chamber of Commerce in Indonesia. “The lower it goes, the harder it will be.” |
| There are reasons for optimism. Many stock markets in emerging economies have rebounded in the past week. International problems have not yet caused the bank runs and large-scale flight of international investors that made previous crises so severe, like the Asian financial crisis in 1997 and 1998. | There are reasons for optimism. Many stock markets in emerging economies have rebounded in the past week. International problems have not yet caused the bank runs and large-scale flight of international investors that made previous crises so severe, like the Asian financial crisis in 1997 and 1998. |
| Central banks in emerging markets have gone out of their way to accumulate rainy-day funds of dollars and other foreign currencies. With the conspicuous exception of China, bank regulators in emerging markets have also imposed tougher lending regulations and kept shadow banking operations on tight leashes. | Central banks in emerging markets have gone out of their way to accumulate rainy-day funds of dollars and other foreign currencies. With the conspicuous exception of China, bank regulators in emerging markets have also imposed tougher lending regulations and kept shadow banking operations on tight leashes. |
| While emerging markets may face trouble from beyond their borders, in many of them spending at home has seldom been so strong. Many businesses are even struggling to find enough workers. | While emerging markets may face trouble from beyond their borders, in many of them spending at home has seldom been so strong. Many businesses are even struggling to find enough workers. |
| In the Philippines, a popular chain of chicken restaurants now promises a free meal to new employees and their families within five minutes of their signing up for work. Some McDonald’s franchises have put up signs offering free meals merely for filling out a job application. | In the Philippines, a popular chain of chicken restaurants now promises a free meal to new employees and their families within five minutes of their signing up for work. Some McDonald’s franchises have put up signs offering free meals merely for filling out a job application. |
| “I’d never seen a sign like that,” President Benigno S. Aquino III of the Philippines, said in an interview at the presidential palace in Manila last week. | “I’d never seen a sign like that,” President Benigno S. Aquino III of the Philippines, said in an interview at the presidential palace in Manila last week. |
| India and Indonesia suffered large declines in their currencies and stock markets last summer, lasting through early autumn, after Ben S. Bernanke, the chairman of the Federal Reserve at the time, indicated in May that the Fed would start easing back on measures that helped keep longer-term rates at historically low levels. Mr. Bernanke’s warnings had the effect of attracting money from overseas investors to the United States. | India and Indonesia suffered large declines in their currencies and stock markets last summer, lasting through early autumn, after Ben S. Bernanke, the chairman of the Federal Reserve at the time, indicated in May that the Fed would start easing back on measures that helped keep longer-term rates at historically low levels. Mr. Bernanke’s warnings had the effect of attracting money from overseas investors to the United States. |
| Both India and Indonesia have since sharply narrowed the deficits in their current accounts, a broad measure of trade and financing. They allowed significant depreciation in their currencies last summer, which made imports more expensive and their exports more competitive. | Both India and Indonesia have since sharply narrowed the deficits in their current accounts, a broad measure of trade and financing. They allowed significant depreciation in their currencies last summer, which made imports more expensive and their exports more competitive. |
| As a result, both countries have less need of further foreign investment in their financial markets, although they could still be hurt if overseas investors withdrew money that they had already put in. | As a result, both countries have less need of further foreign investment in their financial markets, although they could still be hurt if overseas investors withdrew money that they had already put in. |
| “There definitely will be an effect of both the Fed tapering and a cooling China,” said Saugata Bhattacharya, chief economist at Axis Bank in Mumbai. But “India is definitely better prepared today to deal with these foreign shocks than it was nine months ago.” | “There definitely will be an effect of both the Fed tapering and a cooling China,” said Saugata Bhattacharya, chief economist at Axis Bank in Mumbai. But “India is definitely better prepared today to deal with these foreign shocks than it was nine months ago.” |
| Political troubles have played a role in market declines in countries like Turkey and Argentina. They have also played a role in Asia, most notably in Thailand, where Bangkok has been clogged with demonstrators for weeks. | Political troubles have played a role in market declines in countries like Turkey and Argentina. They have also played a role in Asia, most notably in Thailand, where Bangkok has been clogged with demonstrators for weeks. |
| Yet even the Thai tourism industry seems to be weathering the difficulties surprisingly well so far. “Even though everyone says the economies in China and India are having problems, we still see increases in their numbers” of tourists, said Pornthip Hiranyakij, the managing director of Destination Asia, a travel company. | Yet even the Thai tourism industry seems to be weathering the difficulties surprisingly well so far. “Even though everyone says the economies in China and India are having problems, we still see increases in their numbers” of tourists, said Pornthip Hiranyakij, the managing director of Destination Asia, a travel company. |
| The big question now is how much further growth in China will slow. A serious cutback in China’s demand would not just harm emerging markets’ shipments directly to China, it would also cause further erosion in the already falling world prices for emerging markets’ coal, copper, palm oil and other commodities. | The big question now is how much further growth in China will slow. A serious cutback in China’s demand would not just harm emerging markets’ shipments directly to China, it would also cause further erosion in the already falling world prices for emerging markets’ coal, copper, palm oil and other commodities. |
| Jianguang Shen, an economist in the Hong Kong office of Mizuho Securities, last week labeled troubles in China’s so-called shadow banking sector the biggest potential threat to that country’s economic growth this year. | Jianguang Shen, an economist in the Hong Kong office of Mizuho Securities, last week labeled troubles in China’s so-called shadow banking sector the biggest potential threat to that country’s economic growth this year. |
| China has been able to contain meltdowns in the shadow banking sector to a few cities so far. But they have been spectacular where they have occurred, as in Shenmu in the northwest, where all but one of the car dealerships failed last summer, and scores of other businesses closed. | China has been able to contain meltdowns in the shadow banking sector to a few cities so far. But they have been spectacular where they have occurred, as in Shenmu in the northwest, where all but one of the car dealerships failed last summer, and scores of other businesses closed. |
| HSBC, the global bank, calculates that growth in China’s economy now adds twice as many dollars to annual global demand as growth in the United States economy and far more than the anemic economies of the European Union. “China needs to keep humming, or U.S. and E.U. growth would need to step up meaningfully to make up the difference,” said Frederic Neumann, the bank’s co-head of Asian economic research. | HSBC, the global bank, calculates that growth in China’s economy now adds twice as many dollars to annual global demand as growth in the United States economy and far more than the anemic economies of the European Union. “China needs to keep humming, or U.S. and E.U. growth would need to step up meaningfully to make up the difference,” said Frederic Neumann, the bank’s co-head of Asian economic research. |
| One way for developing countries in South and Southeast Asia to avoid being clobbered by weaker commodity exports is for them to displace China’s own increasingly high-cost producers of coal, aluminum and other minerals. Some of that is already happening, with China announcing on Wednesday a jump in imports during January. | |
| Another tactic is for emerging markets to start replacing China as the preferred locale for making export goods like clothing, shoes and electronics. Blue-collar wages have increased at least fivefold in China over the last decade, prompting a few industries, including garment and shoe production, to start shifting to Southeast Asia. | Another tactic is for emerging markets to start replacing China as the preferred locale for making export goods like clothing, shoes and electronics. Blue-collar wages have increased at least fivefold in China over the last decade, prompting a few industries, including garment and shoe production, to start shifting to Southeast Asia. |
| China is still gaining global market share in consumer electronics, however. That may change, though not rapidly enough to help emerging markets this year. | China is still gaining global market share in consumer electronics, however. That may change, though not rapidly enough to help emerging markets this year. |
| Bayu Krisnamurthi, Indonesia’s vice minister of trade, said in an interview in Jakarta that the Foxconn Technology Group of Taiwan, the main manufacturer of Apple devices, as well as other consumer electronics, was preparing to build a large factory in Indonesia. “The other brands will come in their footsteps,” he said. | Bayu Krisnamurthi, Indonesia’s vice minister of trade, said in an interview in Jakarta that the Foxconn Technology Group of Taiwan, the main manufacturer of Apple devices, as well as other consumer electronics, was preparing to build a large factory in Indonesia. “The other brands will come in their footsteps,” he said. |
| Foxconn said in an email reply to questions on Friday that “we are currently in discussions with potential local partners and government officials, a process we expect to finalize in 2014.” | Foxconn said in an email reply to questions on Friday that “we are currently in discussions with potential local partners and government officials, a process we expect to finalize in 2014.” |
| Indonesia was once a symbol of everything that could go wrong in a commodity-dependent country during tough times. During the Asian financial crisis, banks collapsed and civil unrest forced a change of government. | Indonesia was once a symbol of everything that could go wrong in a commodity-dependent country during tough times. During the Asian financial crisis, banks collapsed and civil unrest forced a change of government. |
| But at least for now, Rolls-Royces can still be seen purring through the streets of Surabaya, Indonesia’s second-largest city, and new apartment buildings are still under construction. | But at least for now, Rolls-Royces can still be seen purring through the streets of Surabaya, Indonesia’s second-largest city, and new apartment buildings are still under construction. |
| Whenever global economic troubles threaten, “people are calling for the end of the world in Indonesia,” said Jean-Louis Guillou, the president of Cargill’s Indonesia operations. “And so far, I haven’t seen the evidence for that.” | Whenever global economic troubles threaten, “people are calling for the end of the world in Indonesia,” said Jean-Louis Guillou, the president of Cargill’s Indonesia operations. “And so far, I haven’t seen the evidence for that.” |