Thursday, August 16, 2007

Outsourcing puts Asia at greater risk of slowdown, Citigroup says

Investors are overlooking the increasing risk in Asian markets from rising outsourcing and consumer debt, Citigroup said.

Outsourcing of manufacturing by companies in the United States, Europe and Japan to Asia has made the region "more sensitive" to a slowdown in global demand than at any time in the past 15 years, Citigroup analysts said in a research note. Demand could be hurt if central banks raised interest rates, it said.

Consumer debt is also rising, with domestic credit in 6 of 10 Asian countries equal to more than the gross domestic product. China, South Korea and India registered the fastest growth in domestic debt, the analysts said.

"If these concerns regarding credit quality persist, it would be heroic to believe that the consumer would be willing to take up more debt for consumption or that the loan providers would be willing to extend the loans," they said.

In 2006, domestic credit was at 99 percent of the $13.4 trillion U.S. economy. In China, it has risen to 138 percent from 84 percent in 1995. In South Korea, it jumped to 107 percent from 54 percent, while domestic credit in India rose to 64 percent from 44 percent, the report said. In the euro zone, the level is 153 percent.

One of the side effects of outsourcing has been a rise in the operating leverage of companies as fixed costs increase, the report said. Operating leverage is a measure that compares fixed costs to variable costs.