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Heading off the next Asian crisis

06 Aug Heading off the next Asian crisis

After the global financial crisis, Asia grew at more than 6 per cent each year, outperforming a troubled world. Not just China moreover, but also India, South-east Asia and others. While the United States and Europe floundered, the gravity-defying feat substantiated the idea of Asia’s rise to close the gap with developed economies.

Now, gravity seems to be catching up with Asians.

Growth in China has slowed as the new leadership rejigs policies to discipline credit and spending — much-needed reform to cut wasteful projects and secure the financial system. The government targets 7.5 per cent growth. Still good, but a far cry from the days of double-digit rates.

Indian expectations are even lower after visible missteps combined with a current account deficit of around 5 per cent of gross domestic product (GDP). Spooked investors and capital outflows have led to the rupee tanking.

Similar symptoms show in Indonesia with the current account deficit shooting past 3.5 per cent of GDP in the second quarter. In past weeks, the rupiah has fallen below the psychological threshold of 10,000 to the US dollar even as officials offer reassurance.


Asian capitals promise action and deny crisis. Perhaps triggers for the slowdown do differ from one country to another. Emerging signs, however, show macro conditions are changing and bringing Asian economies under new stresses.

The key factor is American policy. The Federal Reserve is tightening its loose credit spigot. This is the right response for America with the US economy looking up. But implications elsewhere bear watching.

Some start to feel the bottom and anticipate better days ahead in the US, so capital is returning the world’s largest economy (and to a lesser degree, Europe). Exits from emerging markets are felt. As the big waves of easy money recede, the rocks of local problems loom more prominently. Even kings cannot command the tide, and Asians cannot artificially stem this global financial outflow. Efforts must aim instead to adjust to the coming deceleration and ensure no crisis results.

The key responses will be domestic. At the national level, current account deficits must be trimmed or else currencies may shift to find new levels. At the sectoral level, inflated assets especially in property must be reined in.

Over the past 15 years, since the Asian financial crisis, most of the region cleaned up their banking sectors. The excesses of Western banks that triggered the 2008 crisis were largely avoided. But after the influx of capital in these post-crisis years, reviews would be prudent.

Reviewing regional cooperation, too, is useful. Legacies from the Asian crisis include the Chiang Mai initiative — now a multi-billion multilateral currency swop to address balance of payment and short-term liquidity difficulties — and the Asian Macroeconomic Research Office (AMRO) to monitor the state of regional economies.

These are not automated response mechanisms, however. Even if an emerging problem is signalled, governments in the region would need to take decisions. That is a potential gap — understanding and concerted action among Asian governments may not be guaranteed.


Take China and Japan, the region’s two largest economies. Each is currently preoccupied with quite unusual fiscal policies.

Beijing is tightening credit to discipline bad practices even as Tokyo pursues Abenomics, starting with a yen quantitative easing and increased fiscal stimulus. Both must also pursue domestic reform.

The yen and yuan can affect other regional currencies, as well the propensities of Japanese and Chinese companies to invest and trade. There is, as such, good reason for dialogue. Yet, Sino-Japanese political and security tensions run high over competing claims to islands in the East Asian Sea.

Japanese leader Shinzo Abe recently called for a summit to be convened between leaders but Beijing has yet to reciprocate.

Tokyo’s proposal is to meet without pre-conditions, whereas sensitivities over sovereign claims may mean that the Chinese would expect some concession.

Rather than try for a summit about fraught and quite irresolvable issues of politics and security, a dialogue about financial and economic concerns would be more acceptable — indeed, more timely.

This, moreover, could begin with finance ministers rather than leaders.

Such a Sino-Japanese bilateral could be embedded in a larger framework convened by ASEAN.

The region must brace itself for changing and turbulent global conditions. A slowdown can be managed, but if there is an abrupt stall in one country, a wider crisis could trigger.

Dialogue is needed to share Asian perspectives on the coming challenges and prepare intra-Asian cooperation for rougher times ahead.


Simon Tay is Chairman of the Singapore Institute of International Affairs and author of Asia Alone: The Dangerous Post Crisis Divide from America. The SIIA will host the ASEAN Asia Forum on 12 Sept to discuss key issues in the region that matter for business. This commentary originally appeared in TODAY and in the South China Morning Post (under the title “In this together”) on Tuesday, 6 Aug 2013.