ASIA MONTHLY September 2010

ASIA MONTHLY

September 2010

Topics Korea's regional economies changing as globalization gathers pace ····················································································1 Korea ················································································································3 Hong Kong········································································································4 Indonesia ··········································································································5 India··················································································································6

http://www.jri.co.jp/english/asia/index.html

ASIA MONTHLY REPORT July 2010, No.114

Topics Korea's regional economies changing as globalization gathers pace

Against the backdrop of economic globalization, Korean's regional economies are undergoing changes. While gross regional production in the provinces of Gyeonggi-do (Gyeonggi province) and Chungcheongnam-do (South Chungcheong province) is increasing in importance in terms of a percentage of the whole, that in provinces such as Jeollanam-do (South Jeolla province) is trending downwards.

■ Increasing importance of Gyeonggi-do and Chungcheongnam-do As economic globalization pushes forward, Korea's regional economies are also experiencing change. A calculation of the percentages of the total regional production of each administrative area in 2002 and 2008 shows that the top three regions in terms of breadth of growth across the two time points are 1) Gyeonggi-do with 2.7% points (from 17.6% to 20.3%), 2) Chungcheongnam-do, 1.8% points (from 4.4% to 6.2%), and 3) Gyeongsangbuk-do (North Gyeongsang province), 0.4% points (from 6.6% to 7.0%), with Chungcheongnam posting the highest growth rate. In contrast, those with the greatest rates of deceleration were Seoul Metropolitan City at 2.5% points (from 25.9% to 23.4%) followed by Jeollanam-do (0.6% points), Ulsan Metropolitan City (0.5% points), and Busan Metropolitan City (0.4% points). The principal factor behind the remarkable increase in Gyeonggi-do's share of production in the 2000s has been the industrial shift from Seoul. The second factor has been the population influx and commercial development that accompanied the construction of the 'new cities' (cities constructed for the purpose of easing the population concentration in Seoul) which started in the '80s. This caused Seoul's population to begin to fall in the '90s, and the population of neighboring Gyeonggi-do has continued to grow ever since. Figures for net population migration for 2009 show a greater number of people entering than leaving Gyeonggi-do (94,000 people), Chungcheongnam-do (12,000), and Gyeongsangnam-do (South Gyeongsan province) (11,000), and a greater number of people leaving than entering Seoul (minus 52,000), Busan (minus 30,000), and Daegu Metropolitan City (minus 13,000). The third factor has been the concentration of IT related industries. Around 40% of Korea's IT related industries are concentrated in and around Gyeonggi-do, and the number of IT related equipment businesses as a percentage of the region's total manufacturing industry is twice the national average. LG Display has begun production at its seventh generation plant at Paju, switching from Gumi (in Gyeongsangbuk-do), former site of its production till now. Small and medium sized parts and components manufacturers have set up business in the area, and a cluster of liquid crystal display manufacturers has formed in the city. Also, many Japanese and other foreign companies have set up business in Pyeongtaek city. An examination of manufacturing industry trends in Korea in the decade since 2000 shows that

＜Share of Regional Production＞

Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi-do Gangwon-do Chungcheongbuk-do Chungcheongnam-do Jeollabuk-do Jeollanam-do Gyeongsangbuk-do Gyeongsangnam-do Jeju-do

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2002

2008

Source: Korea Statistical Yearbook 2009

The Japan Research Institute, Limited 1 Center for Pacific Business Studies

ASIA MONTHLY REPORT July 2010, No.114

production of electronic parts and components, computers, etc., and “other ＜Growth Rate of Manufacturing Production＞ Total transportation equipment” (shipbuilding, etc.) （2005＝ 100） Textiles has tended to exceed manufacturing industry 400 average annual growth rates by significant Electronic Components, Computer, Radio, Television and 350 Communication Equipment and Apparatuses margins, and this is believed to have been a Medical, Precision and Optical Instruments, Watches and Clocks 300 driver of growth in Gyeonggi-do. Electrical equipment Additionally, factors behind the 250 outstanding growth of production in 200 Chungcheongnam-do include 1) the 150 construction of new factories following 100 restrictions on industrial site development in the Seoul metropolitan area (Seoul 50 Metropolitan City, Incheon Metropolitan City 0 2000 01 02 03 04 05 06 07 08 09 and Gyeonggi-do), 2) the expanded growth of (Y) automobile production (the Hyundai Source: The Bank of Korea、Economic Statistics System automobile plant in Asan), and 3) recent growth in IT related industries. The Samsung Group moved its third generation production of liquid crystal panels from their former base at Giheung-gu (in Gyeonggi-do) to Cheonan, and moved its seventh generation production from Cheonan to nearby Tangjeong. With the start of production of liquid glass panels, production of the glass substrates for these panels also began in Cheonan. Within Chungcheongnam-do, much attention is being paid to Sejong Special Autonomous City (straddling Yeongi County and Gongju City), which was planned as a special administrative district. Earlier plans to relocate the national capital from Seoul clashed with a decision by the Constitutional Court in October, 2004. In January, 2010, President Lee Myung-bak rescinded the plan to relocate the capital. Instead, he formally announced plans to construct a new city for the functions of education, science and economy, that would attract major corporations, universities and research institutes. The plan included the construction of a cutting-edge green industrial zone. The Samsung Group is planning production of photovoltaic energy, fuel cells and light emitting diodes, the Hanwha Group is expected to move into the energy field, and the Lotte Group, foodstuffs research. ■ Economic strength waning in Jeollanam-do, Ulsan and Busan While the economic strength of metropolitan areas such as Gyeonggi-do and Chungcheongnam-do is growing, areas such as Jeollanam-do, Ulsan Metropolitan City and Busan have experienced a deterioration in economic strength. Among the contributory factors are the stagnation of agricultural production and the failure to foster new industries (Jeollanam-do), over-dependence on heavy industry (Ulsan), and the failure to advance industrial development and the lack of space for industrial development (Busan). Until the mid '70s Busan boasted high industrial growth, supported by light industries such as foodstuffs, textiles and plywood, but subsequent industrial reconstruction failed to advance at a satisfactory pace. Today, Busan has selected ten strategic industries (harbor distribution, tourism, finance, software, images, automobiles and their parts and components, shipbuilding, footwear, textiles and fashion, marine produce) as candidates for investment expansion, and is attempting to position itself as an international coastal hub city that will function as a center for distribution, information, finance and tourism on the Pacific Rim. As inter-regional economic wealth gaps widen, the Lee administration has begun to push ahead with new regional development policies. The makeup of the regional policies has been changed from the original 16 cities and provinces to five regional economic zones (Seoul metropolitan zone, Chungcheong zone, Honam zone, Daegyeong zone and Tongnam zone) and two super-regional economic zones (Gangwon and Jeju), and each region plans for their own economic vitalization, based upon their own regional initiative (with individual 'visions' established for each regional economic zone development committee). The super-regional economic zones plan to achieve their development in partnership with regions in neighboring countries, such as China, Russia and Japan. Much attention will be on these developments in future, to see whether the shift away from government driven regional development to development strategies and policies developed by the regions themselves can effectively vitalize failing regional economies. (Hidehiko Mukoyama)

The Japan Research Institute, Limited 2 Center for Pacific Business Studies

ASIA MONTHLY REPORT July 2010, No.114

Korea Self sustaining recovery strength of economy faces tests ahead

■ GDP growth in April to June 1.5% up on previous period Korea's real GDP growth rate for the period Q2, April to June, was 1.5% (flash report), compared to ＜Korea's GDP Growth Rate> （Compared to the Previous Period） the previous period, down from 2.1% in Q1, January to March. (Year on year growth also fell, from 8.1% GDP Growth Rate Facilities Investment Construction Investment Private Consumption （％） to 7.2%.) In spite of this, the economic recovery Exports Imports does seem to be exhibiting marked progress. 15 In terms of demand items, facilities investment (up 10 8.0%) and exports (up 7.0%) were the drivers of 5 economic growth. On the other hand, construction 0 investment fell by 3.4% and private consumption -5 could only manage a wafer thin 0.8% growth. On -10 the supply side, manufacturing growth accelerated -15 from 4.2% in the first quarter, January to March, to 2008/Ⅲ 09/Ⅰ Ⅲ 10/Ⅰ 5.1% in Q2, but construction slowed from 1.9% （Y/Q） growth to minus 0.8%, and service industries fell Source: The Bank of Korea, Economic Statistics System from 1.6% to 0.2%. The contraction in construction has been due to 1) a growing surplus of apartment buildings brought about by economic deterioration and a rush in real estate investments encouraged by low interest rates in recent years, and 2) a reduction in the number of new public works projects, in response to the signs of economic recovery. As the construction slump continues, an increase has been observed in problems such as worsening business conditions among real estate companies, climbing loan repayment delinquency rates among savings banks, and increased household debt (housing loans). On June 25, the government decided to purchase from the savings banks any real estate development loans that looked likely to become non-performing loans. Furthermore, consumption appears to be experiencing a substantial recoil from the consumption stimulus effect of measures implemented last year, and its growth rate is declining. ■ Risk factors remain as economy gravitates towards stable growth A In recent weeks, though domestic and external demand has been performing strongly, there has been a recoil from the rapid recovery enjoyed so far, and growth appears to be losing some of its momentum. Exports (on a customs cleared basis) were up 29.6% in July, compared to the same period in the previous year, supported by the global economic recovery and expanded demand for IT related equipment. Exports to Brazil and Russia have continued to post over 80% growth since May. Additionally, domestic automobile sales have managed to maintain a comparatively high monthly figure of around 120,000 vehicles, but that growth rate is declining. Reflecting these trends, the manufacturing industry business confidence index fell from 105 in June to 103 in July (among export oriented businesses, the index fell from 117 to 112). As Korea's economy gravitates towards stable growth, excluding the real estate issues mentioned above, the following risk factors may be mentioned. One is the blunting of the pace of export growth. This is due in part to factors such as economic deceleration among the industrialized nations as the effects of economic stimulus measures begin to wear off, and the slowing of the Chinese economy as inflation curbing measures begin to kick in. Exports to China recorded a record 90% plus growth at one point, but recently that growth rate is more or less the same as the overall export growth rate. Moreover, LG Display recently announced that it was cutting back production of thin displays due to an increase in inventory, further evidence that the pace of growth in exports to China may very well slow further. A drop in the pace of export growth will very likely lead to a contraction in the scale of facilities investment. Another risk factor is the rising unemployment rate. If the private sector's ability to create new employment weakens, along with the fact that the government's temporary employment measures are due to end in the latter half of the year, the unemployment rate may very well go up. From the foregoing, it looks likely that, as the government steers towards its exit strategy, raising interest rates and cutting back fiscal policies, the economy's self sustaining recovery power will be tested. (Hidehiko Mukoyama)

The Japan Research Institute, Limited 3 Center for Pacific Business Studies

ASIA MONTHLY REPORT July 2010, No.114

Hong Kong Economy expands smoothly, though pace slows slightly

■ Economy maintains high rate of growth Hong Kong's real GDP growth rate in April to June, ＜Hong Kong's GDP Growth Rate(YoY)＞ 2010, was 6.5%, compared to the same period in the GDP Growth Rate previous year (1.4% compared to the previous period). Private Consumption The rate (YoY) was higher than the average annual Gross Domestic Fixed Capital Formation (％) growth rate of 3.7% experienced between 2001 and 30 Exports of Goods Exports of Services 2009. 20 In terms of domestic demand, private consumption 10 for April to June was 3.0% compared to the same period in the previous year (1.5% growth on the previous 0 period). The asset effect has tended to boost -10 consumption. Housing prices rose 9.5% from the end -20 of 2009 to the end of June, 2010, reaching the highest -30 level since 1998. Gross domestic fixed capital 07 08 09 10 (Y/Q) formation increased 28.2% (YoY), encouraged by the Source: Census and Statistics Department of Hong Kong recovery in corporate earnings. As for foreign demand, exports of goods maintained a high 32.2% growth compared to the same period in the previous year (up 4.2% on the previous period). Exports to China grew 25.9% (YoY), in April to June, well down from 40.2% growth in the period January to March. Exports to the US were 20.9% (YoY), in April to June, a massive improvement on 4.3% in January to March. Exports of services increased 7.0%, compared to the same period in the previous year (up 0.8% on the previous period), helped by robust growth in trade related services and increased numbers of visitors, especially from mainland China. Also, the unemployment rate (seasonally adjusted) was 4.6%, up by 0.2 percentage points from January to March. In particular, the unemployment rate in the manufacturing industry went up 1.4 percentage points, reaching 5.9%. ■ Blunting of asset price growth observed As can be seen from the foregoing, private ＜Share and House Prices＞ consumption remains strong, because of the rise in Hang Seng Index (1999＝100) asset prices. However, as the growth in housing Private Domestic Prices Index (House Prices: R) 35,000 150 prices has slowed somewhat recently, it is thought 140 likely that private consumption will fail to 30,000 maintain its strength. 130 There are three reasons for the slowing in the 25,000 120 rise of house prices. The first is that China 20,000 110 switched from emergency financial policies to 100 15,000 normal financial policies. It let banks to repress 90 loans and the amount of capital flowing into Hong 10,000 80 Kong decrease. The second is that domestic and 07 08 09 10 foreign fears of bubble growth in Hong Kong have Source: Census and Statistics Department of Hong Kong (Y/M) led to greater caution in real estate development. Norman Chan, Chief Executive of the Hong Kong Monetary Authority, has pointed out that liquid assets, which account for as much as 10% of total bank financing, could leak out of Hong Kong at any time and warned that there was a real possibility that asset prices could tumble. Mainland China and Hong Kong media have carried headlines proclaiming "asset bubble" and have called for more level-headedness in investments. Thirdly, the Hong Kong government has embarked upon measures such as 1) increasing the housing supply, 2) beefing up taxation on real estate sales and purchases, 3) strengthening the monitoring of the real estate market, 4) working to curb housing loans. Given the foregoing, the outlook is that Hong Kong's economy will gradually lose some of its forward momentum over the latter half of the year.

(Shinichi Seki)

The Japan Research Institute, Limited 4 Center for Pacific Business Studies

ASIA MONTHLY REPORT July 2010, No.114

Indonesia 6.2％ GDP growth for Q2

■ Solid individual consumption, manufacturing recovering Indonesia's real GDP growth rate for the second quarter, April to June, was 6.2%, （％）＜ＧＤP Growth Rate and Contribution by Demand Items＞ 12 compared to the same period in the previous year. 10 GDP Growth Rate This is the first time that the quarterly growth rate 8 has topped 6% since Q3, July to September, 2008. 6 4 The contribution of demand items was 2.8% for 2 private consumption and 1.8% for gross fixed 0 -2 capital formation, and these were drivers of -4 economic growth. In particular, individual -6 consumption has been very robust, with a 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q contribution level well above the 2.3% scored in 2007 2008 2009 2010 Private Consumption Government Consumption the first quarter, January to March. Sales of Gross Fixed Capital Formation Change in Stocks (Y/Q） motorbikes and automobiles in the period April to Statistical Discrepancy Net Export June were up 46.7% and 78.3% respectively, Source: CEIC compared to the same period in the previous year, topping 35.4% and 73.6%, respectively, in the period January to March. The highest contribution levels among supply items were for commerce, hotels and restaurants (1.6% points), followed by manufacturing (1.1% points), transportation and communications (1.1% points), finance and real estate (0.6% points), construction (0.6% points), services (0.5%), and agriculture, forestry and marine (0.4%). Manufacturing's contribution level had fallen to 0.3% points in July to September, 2009, but there has been a noticeable recovery in that sector, with the contribution level exceeding 1% for three consecutive quarters. Share prices are also rising. The stock market index (monthly average price) posted a record high of 2,892 points in April, 2010, and has continued at a high level since then, posting 2,977 points in July. In comparison with earlier in the year, Indonesia, along with Thailand, has one of the most strongly performing stock markets in Asia. Bank Indonesia, forecasting a recovery in foreign direct investment and domestic investment, is expecting economic growth on the order of 6.0% in 2010 and 6.5% in 2011. ■ Can Indonesia match growing interest?

One cause for concern at present is rising （％）＜Consumer Price Index＞ commodity prices. July's consumer price index 25 increase rate was 6.2%, compared to the same period in the previous year, up 1.6% on the previous month. 20 Food CPI Some private sector economists say that, faced with 15 the rapid rise in commodity prices in June to July, 10 Central Bank will be forced to raise the policy interest rate. However, Central Bank has insisted 5 that the commodity price rises were due to the fact 0 that rice production and distribution were disrupted 2008 2009 2010 （Y） by torrential rain, and that the situation is temporary. Source: CEIC Indeed, at the Board of Governors' Meeting in early August, Bank Indonesia voted to keep the policy interest rate (BI rate) at 6.50%. IMF (International Monetary Fund), in a report issued in June, was full of praise for Indonesia's stable economic management, and expressed the view that Indonesia's economy would probably grow by 6% in 2010. In the midst of a series of strikes for higher wages in China, foreign investors' interest in Indonesia is growing. In order for this interest to translate into actual investment, it will be essential for the government to take extra steps to foster an environment that encourages investment, such as reviewing the current labor laws that are so disadvantageous to businesses, eradicating corruption and improving infrastructure provision. With Indonesia's stature in Asia growing, now is an ideal opportunity to implement reform, and expectations of the Yudhoyono administration's ability to take action is growing. (Yuji Miura)

The Japan Research Institute, Limited 5 Center for Pacific Business Studies

ASIA MONTHLY REPORT July 2010, No.114

India The growing importance of monetary policy

■ Policy interest rates raised for 4th time this year At the regular review of monetary policy on July 27, the Reserve Bank of India decided to implement the fourth policy interest rates hike this year, raising the repo rate from 5.5% to 5.75% and the reverse repo rate from 4.0% to 4.5%. The economic forecast, which is considered the premise upon which monetary policy is based, revised the real GDP growth rate for fiscal 2010 (April, 2010, to March, 2011) from 8.0% to 8.5%, and the wholesale price increase rate for March 2011 from 5.5% to 6.0%. These moves would appear to indicate the Bank's awareness that the economy is accelerating and that, as many sectors of the economy experience growth, demand pressure is increasing and inflationary curbs are becoming one of the most important issues in monetary policy. The Reserve Bank believes that, in the future, the expected downturn in the economies of the industrialized nations and other countries and the falling trend in international commodity prices will serve to curb domestic inflation. Also, though excess capital inflow may worsen inflation, given the growing current deficit, a degree of increased capital inflow can be considered necessary. One major item of concern at the moment ＜Balance of Payments＞（million US dollars） regarding inflation is the rainfall trend. F2007 F2008 F2009 Around 80% of the annual total rainfall falls Current Account（①） -15,737 -28,728 -38,411 between June and September. The rainfall in Trade -91,467 -118,650 -117,328 Exports 166,162 189,001 182,163 this period for this year was expected to be 2% Imports 257,629 307,651 299,491 above the annual average. However, as of July Services 38,853 49,631 34,205 Income -5,068 -4,507 -7,404 21, it has actually been 14% below the average. Current Transfer 41,945 44,798 52,114 It is rare for India to experience drought Financial Account（②） 106,585 7,246 53,602 Direct Investment 15,893 17,498 19,729 conditions (rainfall of 10% or more below the Outflow -18,835 -17,495 -11,953 annual average) for two years in a row, and there Inflow 34,728 34,992 31,682 Portfolio Investment 27,433 -14,030 32,396 is much concern as to how the situation will Outflow 163 -177 20 develop in the future. The worry is that poor Inflow 27,270 -13,853 32,376 Other Investment 63,259 3,778 1,477 rainfall will adversely impact agricultural Errors and Omissions（③） 1,316 1,401 -1,746 production and cause food prices to rise, and Total（①+②+③） 92,164 -20,080 13,441 will also have the effect of prolonging lack of Source： Reserve Bank of India growth in consumption in farming communities. ■ Growing importance of monetary policy The first important point of the monetary policy change this time was the shrinking of the difference between the repo and reverse repo rates from 1.5% to 1.25%. The short-term interest rate (overnight call rate) fluctuates between the two in response to liquidity conditions. The main purpose of the shrinking is to lower the volatility of the short-term interest rate. As another policy, in order to improve the transparency of commercial banks' lending interest rates, the Base Rate System was adopted in July. The common aim of these two policies is to improve the transmission mechanism of monetary policy. Since the end of May, liquidity conditions have been very tight because of some special reasons. As this fact shows, the management of liquidity has become more complex these days. The Reserve Bank is going to set up a working group to review the operation of monetary policy. The second point was to double the frequency of the review of monetary policy, which is now held in January, April, July and October. In the future, the review will also be held in mid March, June, September and December. This change was in response to the increased frequency of the timing of policy changes outside of the regular review, due to the drastic changes in the economic environment since the global financial crisis began in 2008. Through this measure, the Reserve Bank is attempting to reduce the unexpectedness of policy implementations, by improving the communication with interested parties. This move shows that India is beginning to catch up with the industrialized nations, in terms of its economic environment and monetary policy management. In the future, the Reserve Bank will be challenged to improve its policy management capability and the transparency of its policy implementation. (Satoshi Shimizu)

The Japan Research Institute, Limited 6 Center for Pacific Business Studies