VZCZCXRO1761
PP RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #0869/01 1320703
ZNR UUUUU ZZH
P 120703Z MAY 09
FM AMCONSUL HONG KONG
TO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 7589
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 HONG KONG 000869 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HK CH
SUBJECT: IMF TELLS ASIAN ECONOMIES TO SPEND MORE, DON'T 
RELY ON CHINA 
 
¶1.  Summary: Trade linkages among Asian economies amplified 
the impact of the global financial crisis to a degree that 
surprised International Monetary Fund economists, said 
Assistant Director for Asia Joshua Feldman in Hong Kong at 
the release of the Fund's Regional Economic Outlook report on 
May 8.  Declines in regional exports are slowing and Chinese 
government spending is supporting growth there.  But the 
Chinese stimulus package is focused on projects that will 
boost its own domestic economy and will not help the rest of 
the region.  Asia's recovery will depend on the return of 
consumer demand in the U.S. and Europe, the prospects for 
which are not good.  Instead of waiting for western consumers 
to return to their free-spending ways, the Fund is advising 
Asian economies to spend more and relax monetary policy, 
while pushing development of domestic markets.  Commenting on 
the Fund's report, Morgan Stanley's Stephen Roach noted that 
policy prescriptions that rely on a return of western 
consumer demand are misguided and doomed to fail.  Others 
agreed that Asian economies need to stimulate domestic 
demand, but argued that just as Asia's trade supply chain 
amplified the impact of falling consumer demand, it would 
also amplify the recovery.  End Summary. 
 
=========================================== 
IMF's New Prescription for Asia: Spend More 
=========================================== 
 
¶2.  Representatives from the International Monetary Fund 
(IMF) presented their May 2009 Regional Economic Outlook 
(REO) report at the Hong Kong Monetary Authority May 8.  They 
noted that the severe impact of the global economic crisis on 
Asian economies had caught them by surprise.  Banks and other 
financial institutions in the region were not particularly 
exposed to subprime lending or exotic financial paper that 
led to serious problems in the United States and Europe. 
Local economies appeared to be on relatively sound 
macroeconomic footing.  However, Fund economists said they 
had underestimated the degree to which the trade linkages in 
Asia amplified the impact of collapsing demand for Asian 
manufactured goods in those economies hit most directly by 
the crisis.  Asian financial institutions' ties with the rest 
of the world have also deepened, leaving borrowers in the 
region subject to difficulties in obtaining credit. 
 
¶3.  The Fund representatives noted that declines in regional 
exports and industrial production are starting to slow and 
that some are saying a recovery is imminent.  China, in 
particular, is experiencing a surge in investment and bank 
lending.  The Fund, however, is not optimistic that Chinese 
stimulus will help the rest of the region, much less the 
global economy, pull out of the current recession.  They 
noted that much of the current Chinese stimulus package is 
directed towards infrastructure development that uses mostly 
domestic inputs of raw materials and labor, and will not 
substantively benefit other economies in the region.  Fund 
economists said Asian recoveries have been characterized by 
slow recovery of investment and domestic demand and they 
warned that lack of access to capital could start a negative 
feedback loop as bankruptcy risk made banks even more 
reluctant to lend.  Asia's recovery will depend on the 
recovery of demand in the U.S. and Europe, where financial 
difficulties are likely to depress growth through 2010, said 
Fund representatives. 
 
¶4.  In the immediate term, the Fund advised Asian economies 
to maintain countercyclical monetary and fiscal policies, 
even if key economic indicators begin to look positive, in 
order to offset any unexpected risks.  The Fund also advised 
a shift away from export-led growth and the development of 
domestic demand as a means to speed the return to pre-crisis 
growth rates.  Building social protection systems to reduce 
savings now needed for health, education and retirement 
expenses and exchange rate appreciation would be helpful. 
 
============================================= ==== 
Local Economists Agree, Warn on Export Dependence 
============================================= ==== 
 
¶5.  A panel of locally-based economists all substantively 
agreed with the IMF's assessment of the crisis and the 
appropriate Asian policy response.  Morgan Stanley's Asia 
Chairman Stephen Roach told the assembled audience that Asian 
leaders are in denial and mistakenly using the same playbook 
as during previous economic crises.  The growth in global 
trade over the past 10 years has allowed Asian economies to 
prosper, but regional economies have no backup plan, said 
Roach.  China is returning to the same policies that worked 
so well in the Asian and Dot.com crises: government spending 
 
HONG KONG 00000869  002 OF 002 
 
 
on infrastructure to tide the economy over until export 
demand picks up again.  The problem is that U.S. and European 
demand will not return to the same levels, and there is no 
way for the rest of the world to make up the difference, he 
said. 
 
¶6.  Deutsche Bank Chief Asian Economist Michael Spencer 
agreed with the Fund's analysis, though he was less concerned 
about the possibility of negative feedback loops.  He noted 
that the impact of the crisis on Asia's economies was 
amplified by their logistical and manufacturing chains, but 
that the impact of a western economy recovery would also be 
amplified.  The nimbleness of Asian manufacturers is likely 
to help them recover more quickly, he said.  Spencer worried 
that the Fund was encouraging continued fiscal stimulus in 
some Asian economies that would quickly find themselves in 
untenable fiscal positions.  He agreed, however, that a loose 
monetary policy would help spur economic activity and pointed 
out that falling inflation rates argued for even lower 
interest rates.  Hong Kong Baptist University professor Wong 
Kar-yiu agreed that fiscal stimulus would help, but he noted 
that for most economies, government spending is only a 
fraction of consumer spending and cannot counteract a sharp 
drop in consumption. 
DONOVAN