Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

PK Basu has 34 years experience covering Asia's economies and markets (equities, fixed income and currencies), including 20 years covering the global economy. He was Chief Economist (SE Asia & India) at Credit Suisse First Boston for 5 years, and Chief Asia (x-Jpn) Economist at Daiwa Securities for a similar period. Among other roles, he was global head of research at Maybank Kim Eng, Malaysia equity research head and chief ASEAN economist at Macquarie, Chief Economist at ICICI Securities, ASEAN economist at UBS and the first chief economist at Khazanah Nasional (where he was co-head of research, and led all agri-business initiatives). PK Basu started his career in the Asia Service of WEFA (Wharton Econometrics) in Philadelphia in 1990, rising to be Director of their Asia Service in June 1994. 
PK's book, "Asia Reborn: A continent rises from the ravages of Colonialism and War to a New Dynamism" won the Tata Literature First Book Award (non-fiction) for 2018. It is the first single chronicle of the modern economic and political history of the whole of Asia (from Iraq and Turkey to Korea and Japan, and everything in between), told from an Asian perspective.

Chief Economist & Political Strategist

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Macroeconomics

The global "investment drought" (which underlies "secular stagnation") is directly traceable to China's two-decade-long investment binge. China's real GFCF has increased 620% since 1996, while the US' has increased just 57% over 19 years, the EU's 31%, and most of Asia (other than India) has seen very modest gains. In the 25 years to 2016, China's investment/GDP ratio has averaged 40% -- and exceeded 40% for the latest 13 consecutive years. The latter levels were reached by Korea and Thailand for just 8 years before the AFC, following which they both experienced steep slumps in their investment/GDP ratios (as did Malaysia, Thailand, Singapore, and the Philippines). China's credit growth averaged 25% annually in the 1989-97 period, similar to the credit growth rates of Korea, Malaysia, Thailand and Indonesia during that period. But while the latter four were then obliged to drastically rein-in credit during the Asian Financial Crisis (AFC), China's bank credit continued to grow rapidly -- despite the fact that NPL ratios in China's banks in mid-2003 (at over 50%) were higher than those of the AFC countries in 1998. While the AFC countries were obliged to carve out banks' bad assets at steep discounts to face value in 1998-2001 (thus teaching banks a salutary lesson, that they have subsequently heeded, by growing credit at a tepid pace), China simply shifted banks' bad assets off their books at face value -- administering no pain, and hence implicitly encouraging even more reckless lending subsequently.The RMB was devalued 50% (to RMB8.7/US$, from RMB5.8/US$) at the beginning of 1994 (following several previous devaluations from RMB2.0/US$ in 1982; Zhu Rongji was able to control inflation in 1994, and thus not dissipate the gains of the 1994 devaluation, as previous devaluations had been dissipated). This was the proximate cause of the AFC, as it made China's exports super-competitive relative to the rest of Asia. The forced de-leveraging of the AFC economies in 1997-2001, combined with China's WTO entry, enabled China to become the factory of the world. Cautious bank lending (and GFCF) in the AFC countries ensured an ever-widening productivity gap in China's favour. By March 2007, Premier Wen Jiabao was speaking urgently of the "Four Uns", highlighting the risk from China's rising over-capacity.When China's over-investment gathered pace after 2009, industrial deflation set in within China, stifling any recovery in investment elsewhere in the world. But China's surging investment (including in real-estate) kept demand up, and created the commodity super-cycle. By 4Q 2011, China's demand for commodities began to fade -- and by 2014, China became a big net exporter of products (such as steel) of which it had hitherto been a domestic user. (In 2015, China exported about 120m tonnes of steel, approximately equal to the EU's total steel capacity, but the average price of China's steel exports was down over 40% YoY, i.e., this was pure dumping). A highly-competitive currency, abundant supply of labour, rapid productivity growth (because of high levels of FAI that far outpaced the rest of the world), and seemingly limitless supply of credit created the China miracle. In 2013, China's working-age population began to decline, ending labour abundance. The RMB is no longer super-competitive, partly because other emerging market currencies have depreciated since 2011. The demographics mean that China's sustainable growth pace is about 4% real GDP growth, but China has since 2013 attempted to keep it above 6% YoY with reckless growth in TSF (including bank credit) in order to buoy FAI. FAI and money-supply growth are constrained by RMB depreciation and its inducement to capital flight. Periods of dollar strength are high-risk periods for China's financial system, as capital flight accelerates -- and China is unable to buoy FAI growth by boosting bank-credit and TSF.A financial crisis in China is the only way for FAI to decline (either a massive immediate amount, or smaller declines over 2-3 years) in order to reduce China's massive over-capacity -- and allow the rest of the world to begin a sustained investment recovery. Our assessment is that China will have its financial crisis sometime between November 2016 and March 2017 (when US interest rates resume rising, after a solitary summer-2016 hike). If the CCP can then manage the political transition in November 2017, China should be able to achieve a Japan-style economic outcome over the next two decades -- while the rest of the world begins a strong new investment cycle in 2017, ending the long period of "secular stagnation".

The global "investment drought" (which underlies "secular stagnation") is directly traceable to China's two-decade-long investment binge. China's real GFCF has increased 620% since 1996, while the US' has increased just 57% over 19 years, the EU's 31%, and most of Asia (other than India) has seen very modest gains. In the 25 years to 2016, China's investment/GDP ratio has averaged 40% -- and exceeded 40% for the latest 13 consecutive years. The latter levels were reached by Korea and Thailand for just 8 years before the AFC, following which they both experienced steep slumps in their investment/GDP ratios (as did Malaysia, Thailand, Singapore, and the Philippines). China's credit growth averaged 25% annually in the 1989-97 period, similar to the credit growth rates of Korea, Malaysia, Thailand and Indonesia during that period. But while the latter four were then obliged to drastically rein-in credit during the Asian Financial Crisis (AFC), China's bank credit continued to grow rapidly -- despite the fact that NPL ratios in China's banks in mid-2003 (at over 50%) were higher than those of the AFC countries in 1998. While the AFC countries were obliged to carve out banks' bad assets at steep discounts to face value in 1998-2001 (thus teaching banks a salutary lesson, that they have subsequently heeded, by growing credit at a tepid pace), China simply shifted banks' bad assets off their books at face value -- administering no pain, and hence implicitly encouraging even more reckless lending subsequently.The RMB was devalued 50% (to RMB8.7/US$, from RMB5.8/US$) at the beginning of 1994 (following several previous devaluations from RMB2.0/US$ in 1982; Zhu Rongji was able to control inflation in 1994, and thus not dissipate the gains of the 1994 devaluation, as previous devaluations had been dissipated). This was the proximate cause of the AFC, as it made China's exports super-competitive relative to the rest of Asia. The forced de-leveraging of the AFC economies in 1997-2001, combined with China's WTO entry, enabled China to become the factory of the world. Cautious bank lending (and GFCF) in the AFC countries ensured an ever-widening productivity gap in China's favour. By March 2007, Premier Wen Jiabao was speaking urgently of the "Four Uns", highlighting the risk from China's rising over-capacity.When China's over-investment gathered pace after 2009, industrial deflation set in within China, stifling any recovery in investment elsewhere in the world. But China's surging investment (including in real-estate) kept demand up, and created the commodity super-cycle. By 4Q 2011, China's demand for commodities began to fade -- and by 2014, China became a big net exporter of products (such as steel) of which it had hitherto been a domestic user. (In 2015, China exported about 120m tonnes of steel, approximately equal to the EU's total steel capacity, but the average price of China's steel exports was down over 40% YoY, i.e., this was pure dumping). A highly-competitive currency, abundant supply of labour, rapid productivity growth (because of high levels of FAI that far outpaced the rest of the world), and seemingly limitless supply of credit created the China miracle. In 2013, China's working-age population began to decline, ending labour abundance. The RMB is no longer super-competitive, partly because other emerging market currencies have depreciated since 2011. The demographics mean that China's sustainable growth pace is about 4% real GDP growth, but China has since 2013 attempted to keep it above 6% YoY with reckless growth in TSF (including bank credit) in order to buoy FAI. FAI and money-supply growth are constrained by RMB depreciation and its inducement to capital flight. Periods of dollar strength are high-risk periods for China's financial system, as capital flight accelerates -- and China is unable to buoy FAI growth by boosting bank-credit and TSF.A financial crisis in China is the only way for FAI to decline (either a massive immediate amount, or smaller declines over 2-3 years) in order to reduce China's massive over-capacity -- and allow the rest of the world to begin a sustained investment recovery. Our assessment is that China will have its financial crisis sometime between November 2016 and March 2017 (when US interest rates resume rising, after a solitary summer-2016 hike). If the CCP can then manage the political transition in November 2017, China should be able to achieve a Japan-style economic outcome over the next two decades -- while the rest of the world begins a strong new investment cycle in 2017, ending the long period of "secular stagnation".  

China: Globalizing Its Imbalances, Part II: FAI And "Secular Stagnation"