Moving From Production to Consumption Based Economy

I consider myself lucky enough to be able to attend the 15th Malaysian Capital Market Summit which was held last couple of month ago. The theme “Scaling New Heights, Facing New Challenges” really catches my interest  in knowing more about the investment challenges & opportunities facing the world, particularly the big players in the economy, and also Malaysia.

The main session discussed about the economic outlook, particularly on the increasing consumption of big and emerging countries like USA, China and India where in China, consumption is expected to grow rapidly in the coming years. To meet this high demand, they probably will go for new sources of energies such as hydro, solar, nuclear etc. From the graph below, we can see that China is currently shifting from production to consumption led growth.

Source: Joseph Tan, Credit Suisse, Singapore

With the increasing income, consumers are now capable on enjoying purchasing power. Nowadays, money is considered very important, which makes the stock market to increase rapidly. Telcom, the largest telecommunication company in China is currently developing the IPTD (Digital Communication) into the mobile phone, which can increase consumption for customers who are seeking for greater entertainment. This not only benefited the country, but it also increases media excellency and improve the related sectors as well. The financial sector is one of the main drivers for this development to aspire quality growth rather than depending on the government.


A Multi-Speed Global Economy

The global expansion is continuing at a slower pace, where emerging markets will achieve 6.2% growth over the next decade, compared with 2.3% growth in advanced countries. Inflation however, will not be a problem in most countries dues to excess productive capacity. While the interest rates are expected to remain low through 2011 in advanced countries but will rise in emerging countries. The fear of a global double dip recession (which refers to a recession followed by a short-lived recovery, followed by another recession) is expected to be relatively low, with a 20% probability.


The Giants of Asia: China & India

In China, the large increases in minimum wages in provinces together with double-digit growth in manufacturing labour costs, particularly in the Pearl River Delta and Yangtze River Delta, are underpinning consumer spending. The retail sales of consumer goods up 18.6% year on year in October, and were 18.3% higher in the calendar year to date compared to the same period last year. The November 2010 Purchasing Managers’ Index (PMI) for manufacturing has continues to indicate expansion in industrial production, which driven by domestic demand. The export orders still show moderate positive expansion, driven by domestic orders. While the industrial production increased to 13.1% year on year in October 2010.


As for India, its private consumption has recovered strongly in 2010 with credit growth accelerating to above 20% year on year. Passenger car sales rose 33% year on year in April-October 2010, with auto production up to 45%. Its capital inflows are expected to increase in 2011, with an improving domestic financial and credit condition. There’ll be an improved access to international capital for domestic businesses as well as to increase its infrastructure spending. The domestic demand such as real consumer spending and real fixed investment is expected to be part of the main tools to sustain India’s growth.


The needs of new energy

Due to increase in populations and demands of goods and services around the world, there is a need to find new sources of energy, especially for big and emerging countries nowadays such as China and India. The coal industry in Indonesia for instance, is currently doing well due to increase demands from these two giants. This automatically led to an increase in Indonesian’s market as well. They are also working with Russia to develop pipelines for another source of energy which is gas. As for oil production, the world currently still relies on the Middle East countries for oil and gas productions.

Another issue is on the ups and down of Hot Money which can be defined as money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. Hot money will flow from low interest rate yielding countries into higher interest rates countries by investors looking to make the highest return. These financial transfers could affect the exchange rate if the sum is high enough and can therefore impact the balance of payments. The question here is where would this money go? Nowadays global investors are putting their money into the Asian market. Therefore we are about to see some more extreme and over-valuation of money coming into the market. Asian countries will benefit in many ways from this two giants, China and India. Indonesia is another very important growth market, which also considered as important dynamo for the region’s growth. Most of the Indian companies are desperate in getting coal to meet their demands, therefore Indonesia very much benefiting from it. They are another country which is currently catching up very well with the emerging and developed countries across Asia.


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