Before the current recession, some economists speculated that Asia's economies had become so vibrant, and trade among them so important, that the region could shake off its traditional dependence on the U.S. and continue to grow quite nicely no matter what happened in the world's largest economy. That "decoupling" theory got tossed out the window as soon as the worst of the Wall Street meltdown bit into U.S. consumer spending in late 2008, sending most economies in Asia into recessionary spirals. Asia found out to its dismay that the region was still far too reliant on exports of PCs, blue jeans and plastic toys to the U.S. to thrive in the face of an American slowdown. Decoupling was laughed off as a fantasy.
But enthusiasts of decoupling may get the last laugh. As Asia inches toward recovery, it is becoming clearer that, in certain respects, the decoupling theory had some merit, and more important, that Asia will very likely become more decoupled from the U.S. as a consequence of the recession. "Yes, decoupling missed big parts of the picture but so did 'decoupling R.I.P.,' " commented Hong Kongbased Merrill Lynch economist T.J. Bond. "Without it, you can't understand what happened in Asia since September 2008."
The most obvious sign that Asia can generate growth without the West is the relatively robust performance of the region's biggest economies. China achieved 6.1% growth in the first quarter even though exports have plunged at least 17% every month this year. India, in the quarter ending in March, beat estimates with 5.8% growth, and even Indonesia, not considered one of Asia's healthiest economies, managed 4.4% growth. Though such rates are far below what these economies had produced before the recession especially in the case of China they still place these countries among the world's best performers.
That growth is being driven primarily by demand from within their own borders. Part of the decoupling thesis was that Asians had become wealthy enough to maintain an acceptable level of growth even if exports to the West sank, by buying and selling goods among one another. Though that was an exaggeration consumer spending in the region can't fill the gap left by falling exports to the U.S. domestic demand appears to be holding up Asian economies amid the global downturn.
Take China. In May, industrial production jumped 8.9% from the same month a year before, even though exports dropped 26%. The reason is that Chinese factories are churning out goods for domestic consumption. Retail sales increased a hefty 15% in May. Consumer goods of all types are selling like hotcakes: passenger-car sales surged 47% in May from a year earlier, while sales of furniture rose 33% and jewelry 29%. Household-survey data from the first quarter show that spending in rural areas is trending upward. "Consumption is certainly becoming a more important engine of growth," noted Goldman Sachs economists in a June report.
Even more important, there are budding signs that the growth in China is beginning to stimulate economies around the region, as decoupling theorists had predicted. Though a richer China, once again, can't completely replace the U.S. as a source of demand for Asia's smaller economies, it can provide for other Asian nations new customers that didn't exist in the past.
Research from Merrill Lynch asserts that Asian exports in April began to tick upward from the earlier months of the year, even though those to the U.S., Europe and Japan continued to decline. How can that be? The revival, Merrill said, is due to a jump in exports to China from the rest of the region. "The rise in Chinese demand has been the major driver of the current phase of Asian export recovery," Merrill contends. (Japan has traditionally been a strong source of demand and investment for the rest of Asia, but it too has become interwoven into Asia-wide supply networks, with exports to China an increasingly important element of its growth.)
There is a chance that this boost to the region from China could be temporary, a result of the massive but short-term government stimulus Beijing is using to revive the economy. For example, China's roaring car market is being fueled in part by government subsidies and tax breaks, measures that are part of Beijing's wider stimulus package. But the government is also taking longer-term steps to encourage greater domestic spending, which could turn China into a more important destination for Asian exports in the future. Beijing is spending $125 billion over the next three years to expand its health-care system to cover 90% of China's population. With medical costs still a major financial burden on the country's poor, the improvements could well persuade Chinese to spend more and save less.
Other Asian economies are positioning themselves to tap into that new, and potentially very large, pool of customers in China. Take Taiwan. After getting slammed by the collapse of American consumer spending first-quarter GDP plunged a record 10.2% it has become a priority government policy to find new buyers for Taiwan-made goods. "We were hard-hit by the shrinkage of the export market in the U.S. and Europe," Taiwanese President Ma Ying-jeou told TIME in May. "So one lesson we learned is we should diversify our export markets." China is clearly on Ma's mind. He is pursuing a comprehensive economic agreement with China that would reduce tariffs on Taiwan's exports to its giant neighbor. China has been a major destination for Taiwanese manufacturers, but to a great degree those exports were components that went into final products assembled in China and shipped to the West. Now, says San Gee, deputy minister of Taiwan's Council for Economic Planning and Development in Taipei, policymakers want Taiwanese companies to sell more directly to Chinese consumers. "The Chinese market is a very important market for us to build our brand names," he says.
What all this means is that Asia is looking more to itself for future growth. In other words, the region is becoming increasingly decoupled from the U.S. The American economy "matters a lot less than people thought," argues Andrew Freris, senior investment strategist for Asia at BNP Paribas Wealth Management in Hong Kong. Decoupling has shifted from a concept to a policy, and that fact may prove to be one of the most important consequences of this great recession.