Asia looking to own consumers to fuel growth

Asia's export-driven economy has a new engine of growth: its own people.

With unemployment low and wages rising, Asian consumers are spurning the thrifty ways of their parents and turning out to buy.

In Japan, spending last year rose at is fastest rate in nine years.

In South Korea, consumer confidence climbed near a four-year high in the first quarter. Even China expects domestic demand to contribute more to growth this year after cutting income taxes and raising minimum wages to pump up consumption.

The rise of the Asian consumer helped prompt the International Monetary Fund to increase forecasts for economic growth for the region and worldwide this year, fund officials said at a conference on April 4 in Cambodia.

Asian stock markets are booming, led by India's, as investors bet that stronger domestic demand will help the region reduce its dependence on consumer spending in the US and Europe.

"We're looking for opportunities that will arise as we see the emergence of a middle class in China, the expansion of the middle class in India and an enrichment of the middle class in South Korea," says Michael Nock, managing director of Doric Capital, a Hong Kong-based hedge fund.

Demographics and economic development are helping drive Asian consumer demand, says Gregory Fager, a director of the Institute of International Finance in Washington.

Younger consumers are more inclined to spend than their elders, and some Asian markets are getting younger: more than half of India's 1.1 billion people are under 25.

Efforts by nations such as China and Vietnam to reduce poverty are also fuelling consumer spending. The share of people in East Asia living on less than US$1 a day fell to 8 per cent last year from 9.1 per cent in 2004, according to the World Bank.

"As poverty comes down in the region, we are likely to see a shift in the drivers of growth from exports more towards domestic demand," says Homi Kharas, the World Bank's chief economist for East Asia and the Pacific. That makes the region, and the world economy, less dependent on savings-short US consumers.

"Asian exporters have counted the US and Europe as their main markets, but are now shipping more products to consumers within the region," says Phil Chen, who manages the US$61 million Grand Cathay Hi Tech Fund in Taipei. "Asian consumer purchasing power will rise along with the region's fast economic growth."

The IMF expects global growth this year of 4.9 per cent, up from a previous estimate of 4.3 per cent. The revised forecast puts growth in China at 9.5 per cent, up from 8.2 per cent, and in Japan at 2.8 per cent, from 2 per cent.

Rising demand in China and India prompted the world's biggest maker of mobile phones, Finland-based Nokia Oyj, to raise its 2006 growth forecast for the global handset market to at least 15 per cent, from a previous prediction of 10 per cent or more.

Starbucks, the world's biggest coffee-shop chain, increased its outlets in China by more than a quarter last year and views investment there as its "number one" priority, says Chairman Howard Schultz.

California-based Hewlett-Packard, the world's second-largest personal-computer seller, expects its Asian PC sales to climb by as much as 20 per cent this year.

Asian stock markets are among the world's best performers over the past 12 months. The Mumbai Stock Exchange Sensex 30 index has risen 74 per cent; the Korea Stock Exchange's KOSPI Index 50 per cent; Japan's Nikkei 225 index, 36 per cent; and the Hang Seng index in Hong Kong, 22 per cent, all in US dollar terms. The Dow Jones Industrial Average, by contrast, is up 7 per cent over the same period.

Of course, Asian consumers aren't likely to embark on the sort of spending spree their American counterparts have had over the past few years, lifting consumption's share of the US economy to 70 per cent.

"It's a very gradual process," says Adrian van Tiggelen, who helps oversee about US$37 billion in global equities at ING Investment Management in The Hague.

Japanese consumers, whose spending accounts for more than half of the economy, are buying more as the labour market strengthens. Japan's jobless rate fell to its lowest level in more than seven years in February. Bonuses rose for a second year last year, the first back-to-back gain in almost a decade.

China is trying to boost consumer demand as it faces US pressure to curb its surging exports. The Government increased spending on education and health care in an effort to convince the country's tight-fisted consumers that they don't need to save as much.

"Growth will rely more on domestic demand as opposed to external trade," Vice Finance Minister Li Yong said on April 3.

Chinese consumers are becoming more confident about their income prospects, a survey published on April 7 by the Beijing-based National Bureau of Statistics showed.

Seeking to capitalise on growth in China's domestic market, Wal-Mart plans to hire as many as 150,000 workers in China in the next five years as the world's largest retailer opens new stores.

"Asia has the makings of a new economic paradigm, where it moves away from the export-led model," says Lehman Brothers chief economist Rob Subbaraman.

- BLOOMBERG