Global Demand after the Crisis

WHAT IS CHIMERICA?FOUR UNCERTAINTIES

THREE POST- CRISIS MODELS

FIVE STRATEGIES

WHAT MIGHT GLOBAL DEMAND LOOK LIKE AFTER THE CRISIS?

Chimerica : no independent ‘rise of the rest’.Accounts for over 60% of the world’s cumulative growth for the past 5 years.

Emerging periphery relied on final demand in the G3.

Accumulated earnings were recycled back to the core.

Financial innovation channeled the credit supply to residential investment, fueling a housing asset boom which boosted consumption.

Export-led growth allowed for rapid industrialization and urbanization in emerging Asia, prompting large spikes in commodity prices.

CORE

PERIPHERY

WHAT IS CHIMERICA?FOUR UNCERTAINTIES

THREE POST- CRISIS MODELS

FIVE STRATEGIES

WHAT MIGHT GLOBAL DEMAND LOOK LIKE AFTER THE CRISIS?

The current crisis: Chimerica has temporarily collapsed. There are four major uncertainties leading from the crisis. Each uncertainty may have legacy effects that can move the world permanently away from Chimerica.

Changes in composition of final consumption behavior

Legacy effect one: rising public debt Sustained financing of this debt may break down.

Move from LT to ST debt.

Raises probability of country default.

Legacy effect two: increased government intervention Intervention may stifle innovation and future growth.

The greater regulatory oversight and tighter lending standards may stunt future growth in startups and cause technological innovation to slow.

In the long run, this may induce a severe rollback in private consumption demand as long-run growth slows with declining innovation.

Legacy effect three: persistent protectionism“Buy America” and beggar thy neighbor exchange rate policies may spark a trade war.

Competitive devaluation and non-tariff barriers may trigger retaliatory action.

The enactment of the Smoot Hawley Act in the 1930s sparked a rapid downward spiral in global trade.

Legacy effect four: G3 consumption changesG3 consumers are saving more in response to a downturn.

US consumers accounts for 70% of US GDP.

Failure of the US stimulus package could lead to sustained negative growth and bleak long- term employment prospects in the US. This may, in turn, entrench savings habits.

Source: US Council of Economic Advisors

WHAT IS CHIMERICA?FOUR UNCERTAINTIES

THREE POST- CRISIS MODELS

FIVE STRATEGIES

WHAT MIGHT GLOBAL DEMAND LOOK LIKE AFTER THE CRISIS?

Post-crisis: three demand models Snakes and Ladders transition. The dice is rolling …Where will we end up?

MODEL AWOUNDED

BEAST

MODEL BCHASM

PRE-CRISISCHIMERICA

MODEL CMENAGERIE

WOUNDEDBEAST

No fundamental shift from Chimerica occurs. Developed countries continue to power growth. Emerging Asia continues to fund G3.

However this is not a return to the status quo. This is a transitory model.

The world is plagued by more volatility as imbalances are exacerbated.

Each subsequent crisis weakens this model.

High cost, High growth, High volatility.

FRAGILE BALANCE SHEETSFUTURE ASSET BUBBLES

RESOURCE VOLATILITY

15 SEPT. 2008 at THE G3

WB

WoundedBeast

PERSISTENT GOVT DEBT

Key message: Resilience

CROSSINGTHE CHASMThe world sees a sustained shortfall in G3 demand.

Rising Asia looks inward towards domestic demand, but this may not be fast enough to restore world growth to previous levels.

The period of adjustment could be painful and might take decades.

How can we grow in this model?

High cost, low growth, low volatility.

Key message: Survival

The middle class is projected to surge – particularly in developing countries and Asia.

But it may take decades for consumption in emerging Asia to drive global demand.

China and India could be beset with political and social unrest.

If…• World GDP grows at 4%,• China’s GDP grows at 9%,• China’s consumption share of its GDP grows at 1%

37 Years

Consumption* in 2007

Consumption in 2007*as a percentage of world GDP

2.1%

17.5%

Chasm: consumption in emerging AsiaHow fast can Asian consumers become a source of final demand?

Highly innovative companies, electronics, telecoms, flat panel displays

High tech innovation, mfg, finance, design

Semiconductor production facilities

Disk drive, niche in S&T, top Western Universities, creative center, high culture and street culture, top

destination for all lifestyles

45 mil

$220bil

66 mil

$130bil

19 mil $100bil

6mil$100bil

72 mil

$50bil

62 mil

$60bil

120 mil

$50bil

20mil$130bil

100 mil

$4,500 bil

46 mil

$500bil

43 mil

$110bilMENAGERIE

This is the emergence of mega-city regions in Asia as sophisticated, self-sufficient centers of final demand.

Regions could grow by complementing each other, or through inward-looking development.

How can we be irreplaceable in Asia’s future?

High cost, High growth, low volatility.

*The orange bar is Light Regional Product, using satellite data of the light emitted at night. Higher concentration of light is correlated with stronger economic production. Data on regional economic production is not comprehensive, so this proxy is useful for comparison.R Florida’s “Who’s your City?”

36 mil

$1,400 bil

18 mil

$430bil

4mil

$200bil

Automobiles electronics

Key message: Relevance

Menagerie: Pearl River Delta snapshotHow fast can they shift gears from servicing exports to their domestic market?

¥711 bn10 mil

¥681 bn

8.6 mil

¥90 bn1.5 mil

¥361 bn6 mil

¥111 bn4 mil

¥315 bn7 mil

¥123 bn2.5 mil

¥111 bn4.5 mil

¥60 bn3.8 mil

¥110 bn0.5 mil

¥2,002 bn

7 mil

Logistics, Financial CenterMfg in electronics, computers..

Financial, MICE, Business Svc, Port, Intl airport Center…

Entertainment, MICE Center

Trade, MICEMfg in auto parts ..

Mfg in electronics … Mfg in laser diodes, electronics…

Mfg in lighting, motorcycles…

Mfg in industrial ceramics…

Petrochemicals, Machinery

PRD excluding HK, Macau (2007 figures)GDP pp RMB 53,820, or 2.8 times national average3.6% China’s population but 8.8% of national retail sales

Port

F&B products

WHAT IS CHIMERICA?FOUR UNCERTAINTIES

THREE POST- CRISIS MODELS

FIVE STRATEGIES

WHAT MIGHT GLOBAL DEMAND LOOK LIKE AFTER THE CRISIS?

Five strategies: preparing for the shift away from ChimericaStrategy

Coping with increased volatility and resource scarcity

Tapping on emerging Asia’s sub-economies

Generating through flow of consumers

Building niche capabilities

Building our hinterland

Ensure resource security

Diversify from G3 final demand

Tap on foreign consumption

Irreplaceable in Asia’s future

Integrate with immediate region

Most important for

WOUNDED BEAST

CROSSING THE CHASM

MENAGERIE

MENAGERIE

MENAGERIE

Energy WaterMetals &Minerals

Food Scalable Infrastructure

Urban Consumption

Rural Consumption

Public sector investment

Fertility TreatmentBaby Education

Film, TV, animeManga culture

Youth culture Finishing school

New agriculture New aquaculture

Tap into hinterland final demand with transport infrastructure.

Some suggestions …

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