The Hamburger
Crisis and Asian Financial Cooperation
Dr.Kriengsak
Chareonwongsak
Senior Fellow,
Harvard Univerisity
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.
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