East Asia’s potential

Updated On: Dec 15, 2008

Asia’s potential to contribute to resolving the current financial crisis is huge with purchasing parity terms making up 35% of the world’s GDP compared to US and the EU’s 20% each. The continent has also been contributing to 50% of the world’s growth in recent year. The region holds one third of the world’s central bank reserves.

China started to accumulate dollar-denominated assets in the mid-1990s and they now make up approximately 70% of its reserves. To help US and itself, it cannot rock the boat by divesting its US holdings to protect the value of their own dollar holdings.

China’s exposure to the Lehman Minibonds is small, just US$700 million. According to EU’s Maastricht Treaty, a country with a debt amounting 60% of its GDP and a current account deficit of 3% is not in danger if its GDP growth is close to 5% and China debt in 2007 was 25% of its GDP with a current account surplus of US$400 billion (15% of its GDP) with economic growth of 11.4% in 2007.

China’s local government also added an additional 10 trillion yuan (S$2.2 trillion) to stimulate its economy, including three trillion yuan invested in Yunnan province and 2.3 trillion in Guangdong province.

With the release of capital into the local areas, the infrastructure, construction and machinery sectors will benefit, banks get help from the expansion of loan volumes which helps to lessen the margin squeeze resulting from low interest rates and the utility sector can profit from the demand for power with the increased infrastructure and construction works.

Other local level initiatives include the Beijing city government offering a subsidy to firms giving jobs to retrenched workers.

Its state media has also launched propaganda to encourage domestic spending and instill confidence in the domestic economy. In addition, instead of hiding bad news about labour unrest and the impact of the global financial crisis on the Chinese economy, the Chinese state media has increased reporting of protests over land, labour and investment issues to manage the impact of negative news by acknowledging and publicizing it to prevent excessive rumour-mongering. Market regulators also disciplined Chinese trading houses to avoid excessive overseas speculation, limit their activity to legitimate hedging.

Patriotism was also mobilized in South Korea in the second week of October 2008 when President Lee Myung-bank discouraged the hoarding dollars and encouraged consumers and companies to exchange dollars and other foreign currencies for the Korean won. This is a reenactment of the 1997-98 appeal by the Korean government to buy local cars and donate gold to the central bank.

In the weekend between 15-16 November 2008, Japan released up to US$100 billion to the IMF as financial help to emerging economies and invested US$2 billion in a new World Bank fund to help recapitalize banks in smaller emerging markets.

Mitsubishi UFJ Financial Group MUFG) has purchased 20% of Morgan Stanley, Nomura Holdings bought up Lehman operations in Asia, Europe and the Middle East, giving them access to new markets and growth potential in the long run.

Morgan Stanley also benefits from this by gaining access to MUFG’s US$1.1 trillion in bank deposits in exchange for MUFG’s representation on Morgan’s board and business tie-ups. Morgan will also have access to US$15 trillion personal financial assets in Japan, about US$8 trillion of which are in bank deposits.

Sumitomo Mitsui also injected several hundred billion yen in Goldman. MUFG also laid out US$3.5 billion to buy the remaining 35% stake in UnionBanCal, making its ownership of the bank total. Up till 25 September 2008, overseas acquisitions by Japanese banks and other financial institutions made up a total of US$12.5 billion.

But Asia also has its own weak points. China’s government has been flamed by angry web bloggers for using its hard-earned savings to bail out and invest in loss-incurring US investments. This will make it more difficult in the future for Beijing to continually cushion the US downturn.

The East Asian economies with surpluses, China, HK, Japan, Singapore and South Korea have aging populations that will in the long run decrease their savings rates.


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