ANYONE who thinks he can predict the future of Asian finance has to know first how
the Asian real economy will be doing. Projections of the future, based on past data,
are notoriously inaccurate. But there are general scenarios that we can paint about
the mega trends in the global economy that will certainly shape what will happen to
Asia.
Roughly every five years, the US National Intelligence Council (www.dni.
gov/NIC_2030_project.html) has been publishing scenarios about the future, the
latest being for 2030. There are no straight line projections into the future, but rather
factors that we do have some knowledge about that will impact on future outcomes.
The key trends are well known, such as demographics, urbanisation, technology and
social media, globalisation, climate change and growing risks through social conflict,
including terrorism, civil disruption and regional wars. The main trend that makes life
much more complicated is the fact that we have moved from a uni-polar world where
the US dominant position has weakened relative to the other major players.
Not only are there new powers emerging, such as the BRICS countries, but also non-
state players like Isis that can fight across borders without a national identity. This
makes coordinated and consistent action much more difficult to manage, which is why
there is little agreement at the level of the United Nations, International Monetary
Fund and other multilateral institutions.
The McKinsey Global Institute has tried to help corporate captains and policy-makers
frame the uncertain future for the period 2015-2025 into basically four possible
outcomes. The best scenario is a globally coordinated and distributed growth
underpinned by broadening productivity increases.
Next are pockets of global growth with imbalances. Scenario three is low but stable
global growth, with lots of muddling through. And the worst is continuing rolling
regional crises with volatile and weak growth all round.
Stimulus packages
Most of what is likely to happen would depend on what is happening near term to
stimulus packages like quantitative easing (QE) and the outlook for energy prices.
Over the long term, the aging of advanced economies, rapid urbanisation (or labour
migration) and technology and global connectivity will shape the final outcome.
The near-term outlook is much bleaker in the post-crisis adjustment period. Having
shot the world full of steroids in terms of QE, the world’s central banks are moving in
divergent paths. The Fed wants to withdraw, while the European Central Bank and
Japan are still bent on using very loose monetary policy. But post-crisis, advanced
country growth are roughly 2% below potential, and their demand for Asian imports
are likely to remain weak.
Which is why Asian finance would depend on what happens in the next decade to the
Asian global supply chain. Historians remember that the Japanese led the post-war
revival of the Asian economies by being the first to supply the demand for consumer
goods by the West.
After growth in Japan peaked in the 1980s, Japan invested heavily in the rest of East
Asia to exploit cheap labour and increase its productive capacity. China’s emergence
consolidated Asia’s key role as the global factory, supplying the rest of the world with
all manner of consumer goods.
The success of the Asian global supply chain meant that Asia ran a current account
surplus with the rest of the world, but mostly with the US. With rising incomes and
savings, Asia became a net lender to the world, further stimulating global growth as
domestic investments, an emerging middle class and demand took most of Asia to
middle-income levels.
But such excessive savings were never properly intermediated within Asia. Instead,
the excess savings were parked in New York and London, returning to Asia in the
form of foreign direct or portfolio investments. Fundamentally, Asia did not upgrade its
bank-dominated system of using short-term deposits to fund long-term investments.
Despite aging population, the level of long-term pension and insurance funds and
therefore the institutionalisation of long-term savings remained small compared with
the banking system.
Low rate policies
Much of this has to do with a penchant for low interest rate policies, beginning with
the Japanese attempts to reflate its economy with ultra-loose monetary policy.
Excessively low interest rates meant that investments may not go to the best use of
funds, while speculation in asset bubbles became more profitable than upgrading
total factor productivity.
China’s stock market gyrations this year symbolise the contradictions within Asia’s
financial system. On the one hand, the stock market should be the source of long-
term equity much needed for giving the whole economy an equity cushion against
overleveraged fragilities.
On the other, the stock market became a casino for retail punters with margin funding.
Which is why the Fed’s decision on raising interest rates has so much impact on the
future of Asian finance, because New York and London remain an important
intermediary for Asian excess savings.
Capital outflows back to New York and London occur precisely because as Asian
excess savings unwind, interest rates will adjust upwards and Asian asset bubbles
will accordingly also unwind.
The irony of Asian growth is that while Asians think long term, their institutional
framework remains distinctly short term. Asian pension and insurance funds remain
too small and lack the firepower and innovative imagination to be the market
stabilisers that are needed for the long haul.
The Japanese pension system is the classic example of Asian institutional weakness.
By putting the bulk of its savings in domestic government bonds, the system is
trapped in terms of returns, since the large Japanese fiscal deficit and debt overhang
(roughly twice GDP) can only be sustained by low interest rates. We then have the
world’s largest net saver becoming the largest borrower, owing everything to oneself.
Can the right hand of an aging person rescue its left hand? Over any demographic
cycle, it is the young that will support the old, so one must invest in the young for the
future to be bright.
The future of Asian finance is less a technical issue and more a mindset problem.
Unless Asian policymakers start thinking more about long-term funding for its young
(in thinking as well as action), it will continue to be subject to the whims of monetary
policy decision in Washington DC.
Andrew Sheng writes on global issues from an Asian perspective.
A version of this article appeared in The Star Online, 19 September 2015
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