Asia’s growing wealth has been accompanied by rising economic, cultural and political influence, prompting predictions that the region will come to dominate the 21st century. Investors have tended to focus most heavily on China, but the region is far larger than China alone.
Numerous other Asian nations are huge economies in their own right, and many have far more favourable demographics and higher long-term growth prospects. Nevertheless, the Covid-19 pandemic and intensifying Sino-US geopolitical tensions have radically transformed their operating environments. Without drastic changes to the underpinnings of their financial and economic systems, not only may the Asian Century never materialise, but underlying imbalances could precipitate social and economic turmoil.
The story of Asia’s rise in recent decades has been one of export-driven growth, leveraging the region’s abundant resources and its large supply of low-cost labour to produce goods and services for the West. This model has relied on three major factors.
First has been the political commitment of the West – and America, in particular – to open and free markets. Second, it has required the value of Asian currencies to be subdued (or, at least, certainly not set by market forces). Third has been Asian governments’ suppression of their own citizens’ consumption, partly via financial repression, but also through their social, fiscal, and industrial policies.
It is now clear that this model is not sustainable. A financially overstretched America cannot indefinitely continue spending beyond its means. The strains on middle class workers have already led to a surge in populist nationalism in the United States, which precipitated the Trump Administration’s trade war. The Covid-19 pandemic has generated further impetus for repatriating supply chains. Rising wealth and income inequality in a number of Asian countries is also threatening greater domestic instability.
China’s economic rise and growing trade with the region could certainly help cushion the blow of a fall in Western demand. However, while Chinese consumption and investment programmes such as the Belt and Road Initiative are a boon to its Asian neighbours, China has shown no inclination to run the protracted balance of payments deficits that the US has endured.
Chinese policymakers are acutely aware of the costs to the US of operating the primary global reserve currency and, as demonstrated by their cautious approach towards renminbi internationalisation, are unlikely to be willing absorb the rest of the world’s financial imbalances. Moreover, China’s rapidly ageing demographic profile will present it with numerous social and economic challenges over the coming decades, and likely limit its ability to absorb growing imports.
Singapore’s Prime Minister Lee Hsien Loong’s thoughtful 2020 article in Foreign Affairs shows that Asian leaders already recognise the need to respond to their changing internal and external environments. Shouldering this responsibility will involve domestic reforms and making use of their increasing influence internationally. In the financial sphere, this would include three broad steps.
First would be to pursue fiscal policies that deliver a broader distribution of the fruits of economic development. This is necessary not just for maintaining social stability; as jobs become increasingly automated, future economic growth and prosperity will depend ever more on well-educated and highly skilled populations.
Second, Asian governments must wean themselves off their dependence on undervalued exchange rates and allow their currencies to reflect their true relative economic fundamentals: currencies must be allowed to find a proper market price. To manage this transition and avoid the risks of the high currency volatility experienced during the Asian Financial Crisis, Asian leaders should push for reforms to the global monetary system – in particular, to reduce excessive dependence on the US dollar.
Third, to support the foregoing two steps, Asian countries should deepen their financial market connectivity to improve regional market efficiency and access to capital. Notwithstanding strong economic growth, regional stock markets outside China (including Hong Kong) and Japan lack sufficient liquidity to attract larger numbers of global investors. In the past, initiatives such as the Asean Trading Link to pool regional liquidity have been stymied by narrow nationalistic interests. Nevertheless, all stand to benefit from enlarging the overall pie. The Eurobond market provides a good example of this, with swaps clearing centred on London, safekeeping and collateral management primarily handled in Brussels and Luxembourg, and issuers and investors spread across multiple countries.
Regional cooperation is needed to support the further development of local currency bond markets to reduce Asian corporations and governments’ dependence on US dollar issuance. Such cooperation would include lowering the barriers to intraregional investment flows, acceptance of Asian local currency sovereign bonds as good collateral in regional clearing houses, and depository and collateral management services designed to meet the needs of the region.
The infrastructure supporting this should be spread across multiple financial centres across Asia – not to render such a vision more politically palatable to individual countries, but because this enhances the mutual dependencies that foster cooperation and avoids excessive control over the system by any one country, which might later be tempted to abuse that position of power.
Amidst ongoing geopolitical tensions between China and the US, if (as Prime Minister Lee asserted) Asian countries “do not want to be forced to choose between the two”, then they must pull together to build the firmer financial foundations required to support their continued economic development.
By James A. Fok