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Public debt, private prosperity for Asia

Updated On: Jul 07, 2011

SIIA Chairman Simon Tay says it's not inconceivable that some Asian governments might go the way of Greece one day. He looks ahead to the day when Asians could be spending more, while still struggling to get the best from their savings.

This commentary was featured in the TODAY (Singapore) newspaper on 7 July 2011. It was also featured in the South China Morning Post (Hong Kong) as "Unlocking prosperity".

The world seems awash in public debt. Problems in Greece with its second bailout are the most prominent but other problem economies in Europe await. Across the Atlantic, the US political system is in a deadlock about containing the runaway federal deficit while many cities and states are struggling.

In contrast, most Asian governments have banked away surpluses and now hold comfortable reserves. Things could not seem more different. Trends, however, may be changing and not always for the better.

The recent revelation by China's auditor-general about debts owed by local governments should be taken seriously. The China Daily described the US$1.65 trillion (S$2.02 trillion) of debt as posing a massive peril to the banking system, since 80 per cent is owed to China's banks.

Compared to the country's overall reserves, the problem may not seem so big. Beijing can issue government bonds, as some urge, or even afford a write-down. But neither will fix the systemic and ongoing problems.

Concerns have to be addressed about transparency, rationality and accountability in government spending. So, too, must allegations about corruption. Such concerns are not limited to China. Stimulus spending and big infrastructure budgets in other countries too can disguise the diversion of funds.

After decades of locking away high savings, Asians find that unlocking and using them wisely can be tricky. Spending is not, however, something to be avoided or simply accepted as inevitable. Indeed, encouraging Asians to spend more is necessary to make growth more sustainable.

Who else can make up for the diminished demand from the West? A lot now depends on the Asian consumer. Newly-rich Asians - mainly hordes of Chinese - buying up luxury goods are just the most obvious sign. An Asian middle class is emerging which, depending upon definitions, will constitute 500 million to a billion people.

Asia-wide consumption is projected to reach US$32 trillion in 20 years, comprising 43 per cent of worldwide consumption. The fastest growing markets for many firms and products will be in Asia. With this, balancing Asian pocket books will enter a new phase.

Household saving rates in Asia will be lower in future. Governments too will, on balance, save less. Surpluses will be cut as trade balances shift. Add stimulus spending and infrastructure investment and reserves will be depleted. Given these trends, over time, it is not inconceivable that some Asian governments might one day go the way of Greece.

Asia's current financial systems have only a limited capacity to allocate saving to those who need capital. Many Asian households still keep a large part of their wealth in real estate, gold and other non-financial assets. Many do not have bank accounts because they lack access to banks, or simply do not trust them.

Governments need to create deeper and more effective financial markets. This would help unlock savings and direct them towards firms that need capital to yield higher returns. Cross-border efforts must also be considered, especially among the smaller economies.

Asians also need to seriously consider creating bonds to provide for investment in infrastructure, education and other needs. This would help governments raise and direct funds to specific needs. Public bonds could also potentially provide some discipline to government spending.

Otherwise, Asian public reserves will continue to be locked in US Treasury bills, perpetuating pre-crisis patterns, and holding them captive to the value of the US dollar. Without other and more productive outlets, private savings in Asia are flooding into assets such as housing, creating artificial bubbles.

Yet, even if Asians can avoid such bubbles and bad loans, develop more self-contained economy and self-generating growth, they must guard against hubris about Western folly. The interdependence with developed countries in both economics and politics continues. Asia's growth will require capital, know-how and skills in such quantity and increasingly higher quality, that exchanges and engagements with the developed economies of the US and Europe will be essential.

Simon Tay
About the author: 

Simon Tay is chairman of the Singapore Institute of International
Affairs. This comment draws on work on a global think-tank panel on the
future of prosperity convened by Aviva.