Heading off the next Asian crisis

Now, gravity seems to be catching up with Asia. Growth in China has slowed as the new leadership re-jigs 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 around 5 per cent of 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 the past few weeks, the rupiah has fallen below the psychological threshold of 10,000 to the 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 Asia 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 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 in the region cleaned up their banking sectors. The excesses of western banks that triggered the 2008 crisis were largely avoided. But follwing 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 will need to take decisions. That’s a potential gap – understanding and concerted action amongst Asian governments may not to 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 regional currencies, as well as 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 maritime claims.

Japanese leader Shinzo Abe recently called for a summit to with China, 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 will 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 could begin with finance ministers. Such a Sino-Japanese bilateral effort 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 be triggered. Dialogue is needed to share Asian perspectives on the coming challenges, and to 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.”