Asian Financial Cooperation and the Hamburger Crisis

The recent global financial surge has been “upside down.” In financial markets, the rich generally accumulate assets and act as creditors lending to those who are poorer. Ironically, Asian creditors have supported major Western countries, particularly USA, although the average per capita GDP of Asia is far less that of the West. But USA has vast current account deficit, and Asia has enormous current account surplus, with this international trade imbalance leading naturally to US Dollar depreciation and Asian currency appreciation.

It was a doubly-inauspicious situation for America, however, when the rising US interest rate coincided with a bubble burst in the housing sector, causing a US credit crunch from late 2007 that has since swelled to become a global economic crisis in which Asian financial sectors are now suffering. Many parent companies in America and Europe have withdrawn their money from Asian subsidiaries, and private capital flow has reversed back to America and Europe, causing tremendous plummets to the Asian stock market index and slight currency depreciation throughout Asia.

This tremendous private capital outflow implies a liquidity problem for Asian firms and fewer resources to borrow. The private sectors of some emerging Asian countries, for example Vietnam, will therefore need financial resources to boost 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 insufficient and cross-border borrowing and lending among Asian countries will be too small to be significant.

Asian financial integration is assessed 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. Asian countries need financial resources to increase the liquidity of their private sectors, but their current financial integration level needs time to develop. Asia’s current intraregional financial market is not functioning strongly to be of mutual assistance within Asia– not to mention financial resources from USA or Europe One single solution may lie in the area of G-to-G financial cooperation.

Many Asian governments, especially Japan and China, have abundant reserve assets as public savings. These untapped reserve assets can be lent to governments in emerging Asian countries, which is less risky than lending them to crisis-affected Western countries, and more productive than just storing them.

Positively, Asia’s G-to-G financial cooperation would support international trade, political and cultural integration, and stimulate economic growth in emerging Asian economies. The crisis would possibly make today’s growing intraregional trade the best alternative to export to USA, and would cause an economic boom in neighbor countries in keeping with an increase in trade partner imports. Ultimately, the positive effect is back to the lender. The classic phrase, “give and take,” is thus still seemingly 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