The Hamburger Crisis and Asian Financial Cooperation

Two words best fit our global financial surge of recent times: “upside down.” In financial markets, the rich generally accumulate assets, and therefore play a role as creditors lending their financial resources to those who are poorer. Ironically, Asian, especially East Asian, countries have been the creditors of major Western countries, especially the USA, although the average per capita GDP of Asian countries is far less that of the Western hemisphere countries.

This phenomenon has occurred due to the vast current account deficit of the USA, as well as Asia’s enormous current account surplus. Without intervention of any kind, this international trade imbalance finally leads to US Dollar depreciation and Asian currency appreciation. Thus, to suppress currency market fluctuation, governments must manipulate their countries’ net capital inflow in order to compensate current account deficit/surplus. This mechanism operated when the American government issued a host of bonds that were largely bought by the Chinese government.

Unfortunately, to lure capital inflow, the US government ineluctably raised the Fed rate. It was a doubly-inauspicious situation for America when the rising US interest rate coincided with a bubble burst in the housing sector, causing a US credit crunch that has lasted since late 2007.

A tropical depression of credit crunch gusting to a hurricane of global economic crisis, is the reason why Asian financial sectors are now suffering. The credit crunch plus US and European financial market panic has aggravated their firms’ liquidity problem. Many parent companies in America and Europe have therefore drawn their money back from their subsidiaries in Asia. At Macro level, private capital outflow thus reverses back to America and Europe, causing tremendous plummets to the Asian stock market index and slight currency depreciation throughout Asia.

The tremendous private capital outflow implies that Asian firms are going to face a liquidity problem and there will be scarcity in borrowing resources. As a result, the private sectors of some emerging Asian countries, in Vietnam for example, will need financial resources to boost their liquidity.

Good news: Asia has abundant savings, relative to the rest of the world. That is, financial resources within Asia are available. Bad news: Asian intraregional financial integration is weak and nascent; the volume of private sector Asian intraregional capital flow is not large enough. Therefore, the cross-border borrowing and lending volume among Asian countries is too minimal to be significantly supportive in a mutual manner.

Many measures can be applied to indicate the level of financial integration, and almost all of them point to Asian financial integration as inter-regional (outside Asia) rather than intra-regional (within Asia). According to IMF statistics, Asia’s portfolio liabilities to other Asian countries are at least three times less than those to NAFTA or EU. This is also true in the case of portfolio assets. Osaka University professors have also found a convergence of savings-investment correlations among Asian countries, concluding that Asia’s regional financial integration has progressed since the 90’s, but is still left behind by other world blocs.

We know that Asian countries need financial resources to increase the liquidity of their private sectors, but their current financial integration level needs time to develop. That is, Asia’s current intraregional financial market is not functioning well enough to be of mutual assistance within Asia– not to mention financial resources from USA or Europe that because of the crisis are even more limited than in Asia. One single solution may lie in the area of G-to-G financial cooperation.

Many governments in Asian countries, especially Japan and China, have a cornucopia of public savings in reserve asset form. These untapped reserve assets can be utilized by lending them to governments in emerging Asian countries, which is now deemed to be less risky than lending them to crisis-affected Western countries, and more productive than just keeping them in treasure.

As for its indirect positive impact, G-to-G financial cooperation in Asia would not only support international trade, and political and cultural integration, but would also stimulate economic growth in emerging Asian economies which receive financial aid. Due to the crisis, within a very short time, exports to USA would be unable to function as Asia’s economic driving force, making intraregional trade possibly the best alternative. In the context of growing intraregional trade nowadays, an economic boom in neighbor countries is synonymous with an increase in import from trade partners. Ultimately, the positive effect is back to the lender.

I believe that the classic phrase, “give and take,” is still applicable in the case of Asian financial integration.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com