Significance and Approach
The US continues to be a dominant provider of global public goods in the realm of finance and investment in Asia Pacific: 1) The US dollar is the major currency for foreign reserves and trade settlement. 2) The US, through the World Bank, the IMF and the ADB, governs finance and investment relationships and acts as a lender of last resort. In contrast, China has become the major trading partner of all countries in Asia Pacific. The fundamental question is how the financial order established through the Bretton Woods system after the World War II needs to be reshaped to match the reality of the world economy today.
The underdeveloped capital markets in Asia and the capital controls notably in China have historically contributed to the high savings rates, the current account surplus and the high foreign exchange reserves in Asia (China $4 trillion, Japan $1.2 trillion, Taiwan $425 billion, Korea $364 billion). The global savings glut—the net asset position of Asian countries and the corresponding US deficits—has resulted in global imbalances, which lead to the Global Financial Crisis in 2007. Will Asia develop a stronger consumption driven economy thereby altering its export oriented growth model?
Is there a serious misallocation of capital globally? Equipped with huge amounts of foreign reserves China actively supports outward FDI. The recent evidence shows that investments in China has become less and less profitable and the total debt—the sum of government, corporate and household borrowings—has soared to 250% of GDP today. In response, the so called “Go out” policy of China develops a global strategy to exploit opportunities in the expanding local and international markets. This is, in particular, aimed at making the State Owned Enterprises (SOEs) in China competitive internationally. The policy is also in line with a broader objective of transforming its economy from an export oriented growth model to a more consumption oriented one. The new initiatives such as the AIIB and Silk Road Fund must be seen in light of restructuring of China’s domestic economy. Similarly Japan is rebalancing its portfolio of estimated $15 trillion of household savings. The Abe government aims to triple its infrastructure export to $300 billion by 2020. The reduction of US treasury bills holding in China and Japan will have a huge impact on the global financial system. The internationalisation of Renminbi through closer trade and investment involvement in the region will restrict the capability of the US Federal Reserve System in adopting quantitative easing policy that has global repercussion. In case of Japan, it remains to be seen whether the rebalancing of portfolio is compatible with the current government debt of over 200% of GDP and the Bank of Japan’s current quantitative and qualitative easing policy.
Channelling domestic savings towards long-term projects with high social returns is a major challenge for all Asian economies. Pension and insurance funds in China amount to less than 3% the size of the banking system compared with more than 60% in advanced economies. Lack of social security, capital controls, underdeveloped consumer finance have contributed to high domestic savings in Asia. Present-day China shares with the Japan of the late 1980s a reliance on investment-driven growth, financial repression, cheap money and a housing bubble. The enormous debts after Japan’s housing market crash generated Japan’s lost decade. South East Asian economies share similar stories before the Asian Financial Crisis in 1997. Will China be able to avoid the same consequences? What will be the long run economic, social and environmental effects of the massive infrastructure investment in South East Asia? The answer lies in understanding relationships between the real and financial sectors. To maximise the growth potential of a region, therefore, we need to understand the function of regional trade and investment in allocating resources of the world economy efficiently. The proposed project explores the new financial system in Asia Pacific which contributes to financial development in the region thereby realizing the full potential of the largest and fastest growing economic region in the world.
Related topics include:
- Reform of development finance in Asia (ADB, AIIB, NDB)
- Development of equity and bond markets in Asia (ABMI)
- Internationalisation of Renminbi
- China’s capital controls
- Financial inclusion in Asia
- Public private partnerships (PPP)
- Small and medium-sized enterprises (SME) financing and micro-lending
- Contingent currency arrangement and exchange rate swaps (CMIM)
- Trade architecture (TPP, RECEP, FTAAP and AEC)
- Cross-border activities of Japanese banks
- The project has three major parts: 1) theoretical analysis of the relationship between the real and financial sectors, 2) quantitative analysis of regional investment and trade flows, and 3) political economy of regional cooperation.