31 Oct 2017

While Europe grapples with Britain's exit from the European Union, and the United States threatens to become more protectionist, Asia is exerting greater influence on global finance and trade. Its economy is growing faster than the world's economy, and China, in particular, is ramping up its bilateral trade with other countries.

Against this backdrop, the Lee Kuan Yew School of Public Policy's Centre on Asia and Globalisation (CAG) is publishing a special issue of its Emerging Markets Finance and Trade journal, titled East Asia's Growing Global Influence and Challenges in Finance and Trade.

The special issue, edited by Dr Tomoo Kikuchi, a senior research fellow in the CAG, is a collection of selected papers that were presented at the second international conference of the Evolving Finance, Trade and Investment in Asia conference series organised by the CAG. The two-day event was held at the LKYSPP in October 2016.

Asia's growing clout

By 2050, Asia will account for slightly more than half of the world's gross domestic product, up from less than 40 percent now, according to a forecast by The Economist Intelligence Unit, the research and analysis division of The Economist Group.

Similarly, while the United States is now the world's largest economy, it is slated to be eclipsed by both China and India by 2050, according to projections by accounting firm PwC. By then, Indonesia is also expected to be the fourth largest economy, with Brazil rounding out the top five economies.

Asian countries such as China have already substantially boosted their trade and financial ties with the rest of the world. By December 2016, China had signed bilateral currency swap agreements with 35 central banks, with the agreements' value totalling renminbi (RMB) 3.6 trillion (US$550 billion).

Dr Fan Zhang, Dr Miaojie Yu and Dr Jiantou Yu, who are all from China's Peking University, analysed all of the agreements signed between 2000 and 2016. They found that even the negotiations for a swap agreement would raise bilateral trade values between China and the partner country by 30.4 percent.

The negotiation of bilateral currency swap agreements is one of the key means to secure RMB-denominated liquidity to cover an open position. Through these agreements, the partner countries are able to obtain RMB needed by their domestic financial institutions. That is why such negotiations lead to higher bilateral trade values, explains Kikuchi.

Challenges and necessary changes

Asia's growing influence, however, also comes with challenges that must be managed. Singapore Management University's Dr Hwee Kuan Chow has found that Asian stock markets are becoming more important emitters of financial shocks.

After a change in the RMB exchange rate regime was announced in August 2015, Chinese stock prices plunged and were followed by sharp falls in Asian stock prices. More recently, in January 2016, trading in Chinese stocks was suspended temporarily after steep losses in the country's CSI 300 stock market index shocked global markets.

The deregulation of stock markets and liberalisation of financial accounts in emerging market economies have increased their connectedness with world markets. China is a case in point, notes Kikuchi. The partial opening of stock markets to foreign investors and the gradual shift towards market-oriented exchange rates have integrated Chinese stock markets into world markets.

The large manufacturing trade surpluses in East Asian countries have also decimated employment abroad and fuelled extremist policies. China, for example, is the leading exporter of final electronics goods. The value of its exports exceeds that of the next 16 exporters combined, and makes up more than 80 percent of its massive merchandise trade surplus.

According to research by Dr Willem Thorbecke from Japan's Research Institute of Economy, Trade and Industry, much of the value-added of China's consumer electronics exports comes from parts and components produced in Taiwan, South Korea, Japan and the Association of Southeast Asian Nations (ASEAN).

Based on his findings, he believes that a concerted appreciation of East Asian currencies, focused on basket-based reference rates rather than nominal exchange rates relative to the US dollar, is needed to rebalance the region's exports.

A vision for Asia

As Asia's global influence in finance continues to grow, so must the capacities of regional institutions dealing with balance of payment and short-term liquidity difficulties, says Kikuchi.

The Chiang Mai Initiative Multilateralisation (CMIM) Agreement, which is a multilateral currency swap agreement for ASEAN, China, Japan and South Korea, now has a fund size of US$240 billion.

However, members can access only up to 30 percent of their maximum borrowing amount from CMIM without triggering International Monetary Fund lending conditions. This must be raised to 100 percent ultimately. To achieve this, further contributions by member states as well as capacity building efforts are necessary, Kikuchi says.

He adds: As Asia's global influence in trade increases, so does the need for further trade liberalisation and deregulation. Currently, there are two mega-regional free trade agreements under negotiations: the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. There are challenges for both.

While trade negotiations are closely linked to domestic politics in each country, there must be a common vision for the whole region.

Tomoo Kikuchi is editor, with Masaya Sakuragawa at Keio University, of a book China and Japan in the Global Economy to be published by Routledge in early 2018. They are also currently working on a book manuscript entitled, New Global Currencies: The Challenge for the Yen and the Yuan.

This piece was written by Feng Zengkun.