The uncertain future of the next Asia

By Ben Simpfendorfer

The rise of Asia has captured the world’s attention. It is has also made the world a more complex pace.

It is no longer enough to simply observe events in the United States, Europe, and Japan in order to make assumptions about the global economy. We must add China, India, and the Gulf to a growing list of countries. The recent decision to establish the G20 as the world’s leading economic body, rather than the G8, only confirms the growing proliferation of economic power.

If that wasn’t enough, the linkages in Asia itself are growing. The region no longer simply supplies oil and consumer goods to the industrialized world. Today, a Middle East sovereign wealth fund can buy a stake in a listed Chinese company that employs 9,000 Chinese workers to build roads, apartments, and even government offices in Algeria.

It is thus a rare skill to make sense of the changes taking place. Stephen Roach is in a position to do so, having spent thirty years working and travelling in Asia and the United States.

His new book The Next Asia, a collection of essays written over the past three years, is expansive and deals with everything from worries about credit bubbles to the need for Chinese rebalancing. In today’s fast-moving world, there is a risk that such a collection reads more as a record of recent events rather than a map to the future. But the book holds important truths and Roach is at his best when talking about the structural challenges faced by China and the United States, and the linkages between the two economies.

For all the excitement over China’s apparent rapid recovery, the economy still faces large imbalances. Fiscal stimulus has focused on building infrastructure and subsidizing exporters. Yet, as Roach rightly argues, the Chinese leadership appear complacent to the risks of a protracted retrenchment in global consumer demand. They have still to make the type of bold policy decisions that would either spur consumption or unleash the services sector.

Yet, these challenges are often overlooked by the West. I sympathize with Roach when he argues that the West wants to look at the Chinese economy in the same way as any industrialized economy, using a similar set of policy tools to decipher policy actions. This can only lead to confusion. The People’s Bank of China is responsible for a much larger, and much poorer, population than the U.S. Federal Reserve, and its mandate differs accordingly.

The confusion is at its greatest when debating the Chinese yuan. Roach rightly notes that United States Congress argues too narrowly for a stronger Chinese yuan. The currency is only one part of a larger economic challenge. Too rapid appreciation would simply push export factories to other low-cost countries, while deterring the Chinese leadership from liberalizing energy markets, tightening environmental laws, and raising minimum wages.

Yet, there are also limits to this argument. Chinese exporters have, in the past six months, rapidly captured market share, not just in the United States, but also in developing countries, such as Egypt and India. The need for a stronger Chinese yuan is thus increasingly urgent as developing countries compete more directly with China while also lack the fiscal resources to soften the blow for unemployed manufacturing workers.

The risks of protectionism are growing. It is surprising then that we have yet to see a serious trade war in the midst of what is a historic economic crisis. Perhaps the answer lies in Roach’s observation that if the United States was to impose tariffs on Chinese goods it would act as a tax on consumers and would only wind up diverting trade to other low-cost producers. It might be that globalization is too entrenched to reverse. The costs are all too great.

If so, the risks of protectionism are greater between Asia’s own low-cost producers. For all the attention paid to Asia’s relationship with the West, it is Asia’s relationship with itself that might present the greatest challenge in the coming years.

Ben Simpfendorfer is chief China economist for the Royal Bank of Scotland. He is also author of The New Silk Road: How A Rising Arab World Is Turning Away From The West And Rediscovering China.

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