Fred Hu, Managing Director, Goldman Sachs Asia



Fred Hu, Managing Director, Goldman Sachs Asia

Thank you.

You know my fellow panelists have prepared some formal written remarks for this panel. But the organizers have done such a fantastic job and the program keeps being updated at a lightly speed so every time I prepared the version, I found the version quickly becomes updated. So the three versions I prepared are totally useless, so, as a result, I have no formal remarks.

But just as what we have heard from the previous three prominent speakers and from the introduction of our chairman, I would like to just make two short comments.

First is the comment on the growth here in Asia, in the region. What is the mid-term prospect? Secondly some points on the potential risks on the horizon that whether you are policy maker, you are academic economists, or you are investor or businessmen, probably to be aware of.

First on growth. If you were a Martian, you know, alien from mars, and landed in Asia in 2004, and you saw the GDP growth rate across the region from China, India to ASEAN all the way to Australia and New Zealand, you know, I'd account Australia and New Zealand as part of Asia, broadly defined. You would have been amazed if you have been told what was the worst financial crisis in more than half a century took place in this part of the world merely 5 years ago. You know, 97-98 Asian financial crisis erupted which lasted until end of 1998, early 2000.

But then, you know the famous economist Paul Krugman concluded the famous controversial paper the Myth of Asian Miracle, described Asian growth as a myth and as a miracle. Because back in 97-98, in much of the Asian region was stricken by financial crisis, economies were deep recession, confidence was shattered, investors were flee in capital disappeared, unemployment skyrocketed, so it was a very stock and very bleak gloomy picture for Asia in 97-98. I still remember there was a deep sense of despair, hopelessness. You know this is a very devastation of confidence.

So who would have anticipated by 2004, barely 5-6 years after the crisis, Asia again becomes the single fastest growing region in the world. Last year, if you read the ADB report, if you read the IMF/WB report, it was a golden year for global growth. World GDP averaged at more than 5%, the highest in nearly two decades. Asia averaged GDP growth approaches 7%, the highest and the fastest in the whole world. And growth was broadly based not just in our dynamic strong economies like China, not just in India, but also across ASEAN and the Oceania and in Australia and New Zealand. It is broadly based.

So Asia is coming back and coming back very strongly. Now, looking ahead, for the threeCfive years, probably 10 years, what's the prospect? I think the prospect remains quite optimistic and quite encouraging. Because there are a couple of underpinning strength for Asian economies.

No. 1 continued openness to trade. Even before the crisis in 97-98, Asia, particularly East Asia was known for its high degree of openness to trade. You know, most Asian economies were based on trade. That has remained true, despite the crisis in 97-98. So if you look at the Asian economies, small, medium or big, typically external trade as ratio of GDP averages 40%, 50% to 60%, even in very very large, I would say, extra large economy like China, 1.6 trillion USD in GDP. Foreign trade, exports plus imports, account for nearly 70% of GDP, that is the single highest ratio. For small open economies like Hong Kong and Singapore, it is not surprising to see typically trade as percent of GDP exceeds 100% or even 200%. But for large economy, with GDP in excess of 1 trillion is very rare for trade/GDP ratio approaches 60% to 70%. So there is a very high, extraordinary high-degree openness to trade, which I think is a very strong underlying factor for Asia.

Second, activity towards foreign direct investment. The previous speakers mentioned there was a competition for FDI dollars. National governments in Asia have unveiled policies, including preferential tax treatment, trying to attract more FDI into their respective countries. There is a great effort made to improve the infrastructure to improve the investment climate. So more and more multinationals, from around the region, from Europe and North America come to invest and set up branches in Asia. Again this is quite exceptional. And inward FDI as percent of GDP turns to, from lowest at 3%, which is still very high by global standards, to as high as 15%-16% of GDP. So FDI possessed its place of significant role in capital formation in national economic development.

No. 3, high savings rate, domestic savings rate. Because of the fidelity of Asian people and government policies, Asian countries tend to have a very high savings rate. As a group, domestic savings rate tend to average of over 20% of GDP and in some cases like Singapore and China around 40% of GDP. So this is, again, for Asia as a block in the highest single highest savings rate in the world, and this will allow Asian countries to invest because of the high savings to invest in infrastructure, such as roads, deep water ports, power stations and telecom networks, but also allow Asian countries to invest in education, health care, and so forth in human capital.

Forth, related to this is vast pool of skilled and semi skilled labor. Many Asian countries, and china in particular, are well endowed with vast pool of relatively inexpensive but literate skilled or semi skilled labor force; this is again a competitive advantage.

Finally, I would say it is Asian economies tend to have exceptionally strong and external strength, by which I define not only many of Asian economies even fast growing economies run current account surpluses and also they have been able to build substantial foreign exchange reserves. So the external positions are very strong. This will show the Asian economies for continued growth and prosperity. So in a word, the Asia is indeed coming back, and I am quite optimistic about Asia's mid-term growth prospects.

Now before I finish, I just want to highlight a couple of key risks facing the region.

No. 1, the challenge to boost productivity. Asia has a lot of savings in place, so Asia can always maintain fairly high degree of investment growth, but the key to sustain the growth Asia needs to invest in technology or R&D and increase productivity. Asia needs to rely more and more on inspiration, on technology. So that is very important. Right now, we have few exceptions, namely Japan, South Korea and Taiwan. I would say most Asian economies are deficient in investing in technology. So that is an ongoing challenge.

Secondly, environment. As a continental country like China and India, industrialized and urbanized as it needs more appetites for energy continues into an issue in the future. Asian economic growths have clearly imposed tremendous pressures on the environment and on ecology. We have heard some similar comments on the Boao forum, but this is another challenge I think may be remindful.

Lastly, is the financial challenge to continue to improve strengthening financial systems in Asia. This is the single biggest lesson in my view from the 97-98 financial crises that Asia has learnt through a hard way. It is that if you have a weak banking system, sooner or later, you will likely run into trouble if there is external shock. Even 5 years or 6 years after the crisis, many of the banking systems in the region still are too weak and china is a notable example. So this is ongoing challenge. And even for Japan. I would say Japan's banking system has been completely turned to corner, so this is an ongoing challenge. And in South Korea, after the 2000-2001 credit bubble, again, we have seen rising appeals and further improvements, the need to further improve risk management. So this is a pan Asian challenge to boost their banking systems. And importantly, to reduce the reliance on bank-dominant financial system, to develop capital markets, to make the capital markets more efficient, more liquid and deeper, so as to improve the efficiency of capital allocation and sustain productivity growth. Relative to this is financial exchange policy, again, this is another big lesson people should have learned from 97-98 crisis, i.e. in the area of increasing capital flows, cross-border capital flows and increased trade linkage and integration. It is important to conduct appropriate monetary and exchange policy. Now I would say, just as observation, many Asian countries or economies, their exchange policy turned to still somehow too rigid. It is not flexible enough, which could present problems for Asia going forward.

Let me just stop it. Thank you.

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