Asia's Inflation Worries Damp Holiday Shopping Cheer

By ALEX FRANGOS

HONG KONG—A cheerful holiday shopping season in the U.S. and Europe could be too much of a good thing for fast-growing Asia's exporters, complicating the region's efforts to fight inflation.

Early indications are that Americans are digging deeper into their pockets than expected to buy televisions, tablet computers and toys, most of which come from Asia. Export figures from Asia have been stronger than expected, confirming a possible bounce in activity. Air freighters from Hong Kong to the U.S. and Europe have been running full loads.

What sounds like good news for a region that derives much of its economic growth from exports could end up being a challenge. Central bankers have kept interest rates low on expectations that consumer demand in the West would stay sluggish. But a boost in growth could be enough to turn a small inflation problem into a bigger one.

"If exports to the U.S. hold up, then Asia is running out of any spare capacity and will quickly find itself with escalating price pressures," says Frederic Neumann, Asia economist for HSBC in Hong Kong. "To keep a lid on prices, Asia needs the West to languish a little while longer."

Unlike in the West, which is fighting deflationary pressures, prices in Asia are on the rise. Food prices and rents are increasing. Factories are running close to or above capacity, and unemployment is low, driving wages higher.

As inflationary expectations in Asia creep up, some are concerned that central banks have been too slow to raise interest rates. China raised benchmark interest rates in October and recently modified its monetary policy stance from "moderately loose" to "prudent," leading to expectations that further rate increases are imminent.

The Asian Development Bank on Tuesday raised its current-year forecast for growth in Asia, saying the recovery "appears to be even stronger than envisaged" in September, when it last published growth forecasts. It predicted the region, excluding Japan, will grow 8.6%, rather than 8.2%. The Manila-based bank credited strong private spending and exports holding up better than expected.

Much will depend on how Asian exports perform in the coming months. Early signs are hopeful from places that specialize in high-tech gadgets that the U.S. and Europe love to buy. Taiwan's exports rose 21.8% in November from a year earlier, to $24.37 billion, driven by strong demand for the island's electronic products, its Ministry of Finance said Tuesday.

South Korea last week also reported strong November export growth. Both Taiwan and South Korea are the first Asian economies to report trade figures each month and are seen as leading indicators for global trade. Their high-tech components are used to assemble telephones and televisions in mainland Chinese factories, and later sold to consumers in the U.S. and Europe.

Stocks of technology companies, such as Taiwan computer maker Acer Inc. and China's Lenovo Group Ltd. have risen on the heightened expectations. Japanese videogame maker Nintendo Co. said it sold 1.5 million consoles and hand-held gaming systems in the last week of November, more than analysts expected.

A consumer rebound in the U.S. is far from a sure thing. Unemployment is stubbornly high at 9.8%. Inventories of goods on store shelves are rising, usually an indicator that retailers will begin to scale back their purchases, fearful of holding too much stock.

Central banks in the region aren't counting on a big burst of economic activity in the U.S., and are keeping interest rates low partially as a buffer against a sluggish 2011. They figure the restocking of U.S. and European warehouses after the financial crisis is over, and now the debt-laden, underemployed consumer sectors will be cautious. Reflecting that view, the Asian Development Bank forecasts growth will slow in developing Asia next year to 7.3%.

Some Asian companies that rely on demand in the U.S. and Europe, having been fooled in the past by good starts to holiday shopping that eventually peter out, aren't convinced yet that the U.S. is really on the rebound.

"It's too soon to say" whether a new wave of buying will come in 2011, according to Stanley Lau, managing director for Renley Watch Manufacturing Co. His company, with factories in Hong Kong, China and Switzerland, produces 1.5 million watches a year for high-end Western brands that sell in the U.S. and Europe. "The next one month will be crucial for our exporters to see the performance of the Christmas sales," he said.

The more optimistic view is that the holiday shopping season will draw down those inventories and new orders will appear in the new year.

Economic-activity signs in the U.S. have been surprisingly healthy, despite the disappointing November jobs report released last week. Major retailers in the U.S. reported a 6.5% increase in sales in November from a year earlier, according to Thomson Reuters. Consumer confidence is at its highest level since May.

There is also good news out of Europe, which is a bigger market than the U.S. for some Asian exporters, including China. Despite fears of Greek and Irish debt woes, German unemployment is at an 18-year low and Nordic countries, such as Norway and Sweden are enjoying solid growth.

Edward Lau, managing director for TNT Express in Hong Kong, says use of the air-shippers' planes between China and Europe over the final weeks of the holiday rush have been "very healthy." TNT recently added service between Chinese interior city Chongqing and Europe, and augmented service from Hong Kong and Shanghai.

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