Fifteen years ago the coincidental timing of the bursting of the dot com US stock market bubble, the terrorist outrage of 9/11 and the accession of China to the World Trade Organisation fuelled a pessimistic view in the West that its days as global economic top dog were finally over.
There was a strong consensus the baton of global hegemony was being handed on at the start of what many said would be the Asian century.
After Britain’s Imperial Century and American domination from 1914 to 2000, the gravity of world power looked to be moving decisively south of the equator.
However 2016 has seen doubts start to creep in regarding the durability of East Asia’s growth model. The new year opened with a series of sharp daily falls in the Chinese stock market, triggering circuit breakers and clumsy intervention by the authorities.
The renminbi then depreciated by a little over 1% against the dollar in the first week of the year, reigniting fears of a major devaluation. But bungled communication by the People’s Bank of China triggered massive selling, forcing it to start buying again to stop the decline turning into a rout.
“There has been increasing anxiety about China’s financial stability and the implications for growth in that country and in surrounding territories, should stability be lost,” says Stephen Lewis, chief economist at brokers ADM ISI who has tracked global economics since the early 1970s.
Cracks in the financial system have been matched by signs of geopolitical tensions in the region. As China has sought to establish its geopolitical role within the region it has managed to put many of its neighbours’ noses out of joint.
Its “nine dash line” on a map that outlines Beijing’s claim to almost all of the South China Sea has triggered maritime disputes with Malaysia and the Philippines, as has Beijing’s programme of building runways and ports on disputed islands within the zone.
According to Lewis, the geopolitical influences in the region look “increasingly negative”. “There have been enough instances of economic prosperity being disrupted by international conflict, the First World War being but the most dramatic, to support the view that the geopolitical trumps the macro-economic in the historical process.”
FLAGGING ECONOMY
The third leg that looks in danger of dropping is the economy. According to the Asian Development Bank’s annual development outlook report published ahead of this week’s annual meetings, the region’s growth momentum is flagging.
From an average of 8.3% a year during 2006–2010, GDP growth in the region fell to 5.9% in 2015 and is forecast to decelerate again to 5.7% in 2016 and 2017, due chiefly to considerable global headwinds and moderating growth in China.
“Risks are tilted to the downside as tightening US monetary policy may heighten financial volatility [and] further moderation in the People’s Republic of China could spill over into its neighbours,” says Shang-Jin Wei, the ADB’s chief economist.
As growth slows, economists are beginning to fret about the large amount of leverage taken out across the region. Standard Chartered bank has put China, Hong Kong, Malaysia and Japan in its high-risk category in terms of leverage risk.
China’s overall credit to GDP ratio had increased by 85 percentage points to 232% since 2008. Malaysia now has a higher household debt servicing ration than the US did at the peak of the sub-prime boom in 2006, while Indonesia has external debt of 2.5 times in foreign exchange reserves.
A bursting of the credit and housing bubbles is the top risk for the region, according to independent research house Capital Economics.
Asia economist Gareth Leather says the “original” tiger economies of Hong Kong, Singapore, Korea and Taiwan are “starting to pay the price” for years of rapid credit growth and surging property prices.
Overarching all this is a slowdown in China’s growth rate as the authorities seek to make the transition from an exporting, manufacturing and infrastructure investment economy into one based more on services and domestic consumption.
HEGEMONY REGAINED
For critics of the Asian Century theory these failings amount to an indictment of the case for the region to take a hegemonic role any time soon.
However its supporters say that western policymakers should adopt the famous long-term view has long guided China. Beneath the headline grabbing developments, an even more profound change was taking place.
According to figures from the ADB, the share of the East Asia and Pacific region in global GDP rose from 30% to 41% between 2000 and 2014 on a purchasing power parity basis. In contrast, North America’s share slipped from 26% to 20% while Europe’s contribution fell from 28% to 23%.
Were EAP to take that share to 52%, it would regain the dominant economic position it held 300 years ago before the industrial revolution.
Martin Jacques, a professor at Tsinghua University, Beijing, and author of the bestselling book When China Rules the World, says it is important to remember that the major financial crisis took place not in Asia, but across North America and Europe.
“There was this widespread notion that China would hit a crisis, but the big crisis was not in China but in the West with the global financial crisis of 2007/08,” he says. “It’s eight or nine years since the crisis and it’s been a lost decade without any sign of a serious recovery or remission.”
Jacques acknowledges that the transition that China and Asia need to make from an export-oriented to a domestic services-based economy to justify its place as the dominant region will take time.
It may take a decade to make “meaningful inroads” into that shift. “You can’t straight line the rise of Asia because it will have to go through lots of phases and stages and there will be some serious governance challenges down the road,” he says.
He says evidence of a shift in gravity is stronger now than at any time this century. “The point is — and there is nothing that’s happened to contradict this — is that Asia is on the rise.”
PIVOT TO ASIA
This shift of power is most obvious in the way that China and its Asian allies have sought to set up their counterweights to the international financial bodies such as the International Monetary Fund and World Bank.
They are clearly fed up with the failure of the US to allow reform of the International Monetary Fund and World Bank to give them greater say in line with their economic weight.
The decision by China and India — together with Brazil, Russia and later South Africa — to form the Brics grouping has been seen as a successful attempt to wrest power and influence away from the G7.
While the Brics are setting up a New Development Bank, Beijing has gone further by establishing Asian Infrastructure Investment Bank as an alternative source of capital to the IMF and World Bank.
The decision by Britain a year ago to become the first industrialised country to join in the face of US opposition was seen as a sign of the shifting sands of influence.
“The UK joining the AIIB was recognition firstly that China is the future,” Jacques says. “It recognises that China is going to be the biggest economy in the world. Therefore it is very important to find a productive relationship — you have got to engage with China.
“Everyone is pivoting to Asia. Asia is returning to where it was before the industrial revolution. There is no evidence that this process is not happening and continuing; on the contrary all the evidence suggests that it is.”
QUANTUM OF GROWTH
This tension between the region’s short-term and long-term outlook was highlighted at last month’s spring meeting of the IMF. It forecast Chinese growth at 6.5% this year, at the bottom of the 6.5%-7.0% set out by Premier Li Keqiang in March. It then sees growth slowing to 6.0% by 2018.
Maurice Obstfeld, the IMF’s chief economist, says the downgrades to China’s outlook are based on the fact that its stimulus programme to maintain growth at 6.5% would be devoted to “declining and not that productive” sectors.
“We worry about the quality of growth more than the quantity of growth,” he says. “If the quality of growth is lower in the short run even though the quantity of growth is higher, you might think that longer-term growth will be lower.”
Of course it is important to note that emerging and developing Asia was the only region of the world where the IMF actually raised its growth forecasts for this year and next (to 6.4% and 6.3% respectively). Indeed China was the only major economy to enjoy an upward revision, to 6.5% and 6.2% respectively.
Fifteen years into the new century and the jury is still out on whether it will be Asia’s. “East Asia’s future hegemony cannot be taken for granted,” says Lewis at ADM ISI.
But Jacques, speaking en route to the Credit Suisse global megatrends conference in Singapore, says the rise of China’s and the region’s “hegemonic capacity” is clear to see.
“The West can’t bring itself to realise that this is happening – but it is happening. The longer the West doesn’t understand it the longer it will be mired in its own backward looking outlook.”