U.S., China Links May Determine Exit Strategy Timing, ING Says

By Shamim Adam

Oct. 21 (Bloomberg) -- The extent of an Asian economy’s integration with the U.S. or China may determine the timing of its exit from stimulus measures implemented to counter the global financial crisis, according to ING Groep NV.

Countries that have closer trade and economic links to China and are more dependent on it for growth will be among the first to raise interest rates, Tim Condon, chief Asian economist for ING, said in an interview today. He pointed at Australia as an example, and said South Korea will probably be next.

Australia’s central bank this month became the first among the Group of 20 countries to raise rates since the height of the global crisis, as the world emerges from its recession. Bank of Korea’s Governor Lee Seong Tae and Reserve Bank of Australia’s Governor Glenn Stevens are indicating they may raise borrowing costs at a faster pace in coming months.

“Australia, by virtue of its commodities orientation, is locked at the hip with the Chinese economy, and it’s for that reason it was the first to move on the exit strategy,” Condon said. “If the economy is more integrated with China, its central bank is close to implementing the exit strategy. If the economy is more integrated with the U.S., the timing is farther out.”

Australia’s proximity to Asia is helping its economy rebound faster than most other developed nations. Trade figures show the nation’s largest export customers this year are China, Japan, South Korea, India and the U.S. Six years ago, the U.S. was ranked second.

‘Very Powerful’

China’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. Gross domestic product probably grew 9 percent last quarter, the fastest pace since the three months ended September 2008, according to the median estimate of 34 economists surveyed by Bloomberg News.

“China is responsible for the export-led recovery, ranging from very powerful in North Asia to somewhat indifferent in some parts of Southeast Asia,” Condon said. “The pace of the export-led recovery is going to determine the timing of the exit strategy” for the rest of the region.

Governor Lee last week said any future increase in South Korea’s benchmark interest rate can be bigger than the central bank’s usual 25 basis points. It cut rates by 3.25 percentage points from October to February, the most aggressive easing since it began setting a policy rate a decade ago.

China is the biggest buyer of South Korean goods, and overseas sales to its neighbor are more than double those to the U.S., according to government data. The South Korean central bank may raise rates in December or January, Condon said.

‘Cold Water’

In Hong Kong, the central bank “is trying to pour cold water on the property market” while Taiwan will probably raise interest rates some time after South Korea’s move, Condon said.

Thailand’s central bank may keep its key rate unchanged at a fourth consecutive meeting today to support the economy’s recovery from recession, according to all 26 economists surveyed by Bloomberg News.

The Southeast Asian economy is more integrated with the U.S. than China, Condon said. Thailand exports 11.4 percent of its goods to the U.S. while shipments to China make up about 9.2 percent, he said.

“The Bank of Thailand was Asia’s most slavish Fed tracker during the last Fed tightening cycle and we expect history to repeat itself,” Condon said. ING predicts the Bank of Thailand will raise rates in the third quarter of 2010.

Economic Recovery

In Malaysia, central bank Governor Zeti Akhtar Aziz has said interest rates are at an “appropriate level” and are supporting the economy’s recovery. Easing inflation allowed Bank Negara Malaysia to reduce its key rate from 3.5 percent in mid- November to a record low of 2 percent. It kept borrowing costs unchanged at its August meeting.

“A higher U.S. export-destination share tells us that Malaysia’s economy, like Thailand’s, is more integrated with the U.S. than with China,” Condon said. “We think this means Bank Negara Malaysia, like the Bank of Thailand, will remain on hold for an extended period.”

While Malaysia’s exports to China have been rising, “it’s not big enough to lift the whole economy,” Condon said.

The timing of rate increases in Indonesia is less dependent on its links with China or the U.S., and more contingent on its inflation outlook, the ING economist said.

Bank Indonesia kept its benchmark rate unchanged for a second month at 6.5 percent on Oct. 5 after nine consecutive cuts since December last year. Inflation may accelerate to between 4 percent and 6 percent next year compared with this year’s estimate of 3.5 percent to 5.5 percent, Bank Indonesia Senior Deputy Governor Darmin Nasution said Oct. 14.

“Indonesia investors are particularly inflation wary,” Condon said. “The central bank will act early next year in the face of accelerating inflation to signal that they are on the case and prevent inflation expectations from rising.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net