Shift to Shankong

The heart of the main retail district in Seoul could hardly be more different than that of western cities. Instead of competing businesses being dispersed among outlets selling non-competing products as you’d find elsewhere, in South Korea’s capital city they are all congregated together.

Standing side by side on the main retail strip – the Jongno road – are dozens of businesses selling car parts, dozens more selling lighting products or textiles or electrical fittings or homeware.

And further down the road, one of the oldest east-west thoroughfares in the city, there’s an old, multi-level department store standing directly in front of a modern one. Inside the first, entire floors are filled with tiny booths staffed mainly by women watching soaps on television. Piled high on benches are locally manufactured jeans, shirts and jackets. There are no lifts in the store, only stairs, and elderly porters with whip-cord leg muscles stagger up and down them bearing massive loads on their backs. Nobody bats an eye at a sight that would stop western shoppers in their tracks.

In total contrast, the modern store is organised along western lines with elaborate displays of mainly international brands, generous spaces and attentive counter service. Escalators replace the stairs and staff speak excellent English.

Poster boys
The symbolism is clear. An economy in rapid transition, South Korea can be taken as a proxy for the rest of Asia. While China and India attract most of the publicity as poster boys for the Asian miracle, South Korea could just as easily be substituted instead. It’s in the throes of a breakneck transformation from an economy built on domestic sales to a highly international one that trades global brands such as Samsung Electronics, Hyundai Motor and LG Electronics.

And although this country is one of the least understood examples of the “Asian miracle”, the re-making of South Korea says a lot about the rapid shift of economic power from west to east that’s lately become known, albeit inaccurately, as “Shankong”.

Few westerners realise the untroubled way that Asia sailed through the crisis. The result, say economists, is a marked change in the epicentre in global trade and finance.

The latest statistics tell the story. According to a June study by the IMF on the performance of emerging nations since the collapse of Lehman Brothers in November 2009 that triggered the cataclysm, the west continues to flounder while Asia booms. Between the region’s low point and December 2009, average GDP grew by 6.4 percent while average industrial growth shot up by a staggering 26.7 percent. In Europe, the comparable and highly thought-provoking figures were 1.2 percent and 4.3 percent, or roughly six times lower on both counts.

Predictably, China led the charge. Its economy grew by 8.7 percent while foreign trade soared by nearly 45 percent, a number totally beyond the ambitions of any European government in the immediately foreseeable future.

Gravitational shift
According to Asia-watchers like Yale’s professor Jeffrey Garten, these numbers illustrate a gravitational shift that’s triggered in part by a flight of banks, manufacturing and other sectors from bloated, mis-managed western economies to more relaxed and less hidebound eastern nations. He cites the USA and UK in particular as being over-regulated, over-taxed and under-invested. (South Korea’s annual investment in R&D, for example, is higher than that of Germany, the USA and UK).

Professor Garten also notes the growing number of global-sized companies congregating in regional capitals such as Singapore, Mumbai, Beijing, Hong Kong and Seoul. Following in their coat-tails is a financial services sector anxious to service them. And for good measure, as the Yale economist points out, most of these nations are big savers. China will be “the world’s largest creditor for decades.”

Meantime most of the region’s economies are banking torrents of western capital, with China the stand-out example. Last year, according to the IMF, China booked over $200bn in FDI. Much of that may be hot money attracted by the undervalued renminbi which has been pegged to the greenback since the beginning of the crisis, but it marks an important milestone in the “Shankong” phenomenon. Last year China’s foreign reserves rocketed by 23 percent to $2.4trn, two thirds of them in US dollars.

Even more startling, Asian nations now hold the lion’s share of the reserves held by the world’s central banks. At present these stand at $7,500bn, an all-time record, with nearly 60 percent sitting in the vaults of just six nations. Five of these are Asian – China, Japan, India, Taiwan (surprisingly so to many) and South Korea – with Russia the odd man out.

Bigger say in G20
At this rate it’s only a matter of time before the region is given a bigger voice in the G20 major economies.

Already six of the big 20 nations are from the Asia-Pacific region, yet it qualifies for only 20 percent of IMF voting shares instead of the nearly 30 percent to which it’s entitled as measured by economic power. “It is only natural for Asia’s voice to become increasingly influential in global economic and financial discourse,” points out the IMF.

And, as Asia’s leaders well know, the west desperately needs the region in the rebound from the crisis. This is for two main reasons. “First, unlike in previous global recessions, Asia is making a stronger contribution to the global recovery than any other region,” adds the IMF. “Second, also in contrast to previous episodes, recovery in many Asian countries is being driven by two engines – exports and strong domestic demand.”

Many westerners fail to appreciate how outward-looking some of these previously “hermit” economies have become – and how quickly. Since 1990, emerging Asia’s share of world trade has doubled and its share of world GDP has tripled.

A two-speed world
And nothing’s changed recently. Since the crisis, the west is stuck in first gear while the east is in overdrive. “It’s a two-speed world”, explains Philip Lowe, assistant governor (economic) of the Reserve Bank of Australia, a nation that is sitting in the sweet spot of Asia’s economic take-off. “As a group, the G7 countries are experiencing only relatively weak growth. In contrast, the picture in Asia is quite different, with many of the economies in the region having had near V-shaped recoveries.” That is, the recovery was as rapid as the decline, modest as it was in the first place.

Hardly surprisingly, there’s been a sharp jump in M&A action throughout Asia. According to Mergermarket, the first quarter of the year saw $89.4bn worth of deals in the region, and that’s excluding Japan. That represents an increase of over 90 percent on the corresponding quarter in 2009.

Also unsurprisingly, western banks are flocking to the region and particularly to China despite some teething troubles by pioneering western banks such as Royal Bank of Scotland which has now sold out its business there. According to McKinsey, some 30 percent of the increase in global financial services revenue in 2007-12 will come from China alone.

Inevitably, these bright prospects have sparked a contest between the region’s cities to become the preferred business capital. The main contestants are Shanghai, Hong Kong and Singapore. Right now, the latter seems to be winning.

Nearly four hours flight south from Hong Kong, the city state has gone out of its way to put itself in the middle of this benign storm by, among other things, offering sweeteners for foreign companies such as tax-free status on qualifying profits for high-value, “pioneer” businesses. This is a big reason why global names such as Microsoft, Oracle, SAP, Dell, Capgemini, Chevron, Glaxo¬SmithKline and Diageo have chosen Singapore as their regional headquarters.

The fund management industry has also adopted Singapore. According to Magnus Böcker, chief executive of the Singapore Exchange, some $1,250bn assets are under management in the state, roughly twice those of Hong Kong. “There is an attractiveness for them in reaching out to the Singapore-based institutional market,” says Böcker.

However Hong Kong is fighting back. It will host some blockbuster IPOs this year including the massive $20bn one of Agricultural Bank of China, probably the plum offering of the year.

Meantime banks are reinforcing their treasury operations to cope with the demand. For instance, HSBC announced in June it was seeing “unprecedented levels of client activity across the region as clients have heightened their focus on treasury and working capital management [in the wake of] the global financial crisis.”

However there’s still work to be done in the region and the shift in economic power seems to have spurred on governments, central banks and the private sector to embed important reforms that are intended to cement Asia’s position in the global economy. As the region’s dominant economy, China has come in for criticism for not opening up rapidly enough. It is repeatedly told to speed up integration with the global economy, for instance by facilitating foreign investment more than it has in the past. “The Chinese economy should become more like that of the United States—a large country that is a major global trader but whose growth is driven primarily by domestic demand,” suggests Linda Yueh, director of the China Growth Centre and fellow in economics at Oxford University, in the IMF’s latest global survey.

And despite a rapidly prospering middle class, especially in India, a high proportion of the world’s poor still live in Asia. In south Asia, for example, 40 percent of the population exist on less than $1.25 a day.

Furthermore, the poor have been hard-hit by the financial crisis. The World Bank estimates 14 million more people in Asia will be living in poverty as a result.

Hungry for market share
However South Korea has shown what’s possible. It has evolved from a state of abject poverty to one of general prosperity in a few short decades. As a McKinsey study noted recently, it’s “a manufacturing powerhouse that has virtually eradicated poverty, malnutrition and illiteracy.”

And also like the rest of Asia, it’s not stopping there. Economists Stephen S Roach and Sharon Lam point out that the financial crisis was almost an irrelevancy for the nation. “Despite its heavy reliance on exports, South Korea registered only a single sequential quarterly decline in real GDP during the global downturn. Among Asia’s “tiger economies” South Korea suffered least from the crisis and recovered the most rapidly,” they explain.

The performance of electronics brand Samsung is one reason why. Less than a decade ago, hardly any consumer outside South Korea had heard of it. Today Samsung ranks 19th on Interbrand’s top-ranking global names ahead of much longer-established brands such as 29th-ranked Sony.

Samsung is leading the way for other South Korean exporters who actually gained market share during and since the crisis. They now have 33 percent of the global market in mobile phones, up from 22 percent at end 2007, 37 percent of the LCD television market (up from 27 percent), and nine percent of the automotive market (6.5 percent).

A decade ago, these gains would have been considered unthinkable but they still aren’t enough for a newly ambitious South Korea, or Asia.


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