by Parag Khanna
This is where the Belt and Road Initiative comes into the picture. China has been reserved about fixed investment in its own neighborhood—until now. Dan Rosen, a veteran China watcher, likens studying China’s investment policy to spectrometry: watching the radiation sheds light on its inner character. To avoid having its savings overly concentrated in real estate and banks, China has acquiesced to further capital account opening, which spurred a wave of outbound flows peaking at $225 billion in 2016, at which point it suddenly cracked down on outward investment, instructing companies to end the pursuit of frivolous trophy assets and instead focus on Beijing’s strategic priorities. In 2017, then, China’s outbound FDI dropped below Japan’s $170 billion—but with a much clearer focus on infrastructure in BRI countries. Funds in Beijing and Shanghai are sitting on tens of billions of dollars they have been mandated to invest in their neighbors’ high-potential sectors from infrastructure and commodities to banks and telecoms. From Pakistan to the Philippines, China is laying down fiber-optic cables and setting up 5G mobile phone operators for hundreds of millions of people. Most of the world’s largest engineering, procurement, and construction (EPC) companies are Asian, with giant contractors in China, South Korea, Japan, India, Turkey, and Saudi Arabia—and all of them want to build across Asia’s jigsaw borders.
China already trades three times more with Asian countries than Japan does, making the renminbi ever more attractive as a currency for intra-Asian trade. At present, trade denominated in US dollars is four times greater in volume than the United States’ actual share of world trade. Yet with the strong dollar making imports more expensive than they need to be, Asian countries have an incentive to shift away from the dollar. Though the Chinese renminbi is not likely to become a singular currency for Asia, Asian central banks are accumulating renminbi as their trade with China increases. China is intentionally pursuing internationalization to lock partners into renminbi-denominated trade prior to making its currency freely convertible. It aims to have half its trade denominated in renminbi in the near future—a goal that switching oil contracts to renminbi would advance rapidly. China is also strategically pushing blockchain-based currencies so that it can trade in ways that will evade the long arm of the US Treasury Department and its sanctions. Given the rapid advance of these blockchain instruments, it is more likely that all Asian countries will use them to denominate trade with each other than that they will all change to using the renminbi. Whatever the currency, central banks such as those of Singapore, Australia, and New Zealand have established financial technology (“fintech”) bridges to enable seamless cross-border payments with others quickly getting on board. In Asia, money knows very few borders.
Capitalism, Asian Style
Asian countries have no doubt that globalization has been their ticket to prosperity. Even as they become less dependent on Western economies, they are pursuing an “open regionalism” of integrating with one another while expanding trade ties far and wide. US backtracking on trade liberalization (even within its own region through NAFTA) has not diminished Asia’s appetite to expand trade with every other world region as well as the United States. Throughout history, “free trade” has been advocated by rising powers with trade surpluses, notably Great Britain in the nineteenth century and the United States in the twentieth. In reality, however, they pursued a neomercantile strategy of import substitution and aggressive government-backed international expansion to achieve their superpower status. Asian powers are no different: they want economic globalization, not free trade.
Asians see the market as a partner, not a master. Asia became such a powerful economic region by applying lessons from the spectacular economic rise of Japan and South Korea through export-oriented, state-directed capitalism, as well as China’s usage of special economic zones to attract foreign capital and technology, capital controls to prevent destabilizing short-term financial flows, incremental trade opening to protect key sectors, and industrial policy to stimulate strategic commercial niches and exports. From Russia to Saudi Arabia to Vietnam, state-backed companies ensure national control over critical industrial domains. There are also global champions in every sector. For every commodity China most requires—oil, steel, aluminum, lithium, and so forth—Chinese state-owned enterprises and holding companies have expanded globally and sought dominant stakes in local suppliers. Today the five largest banks in the world by assets are Chinese or Japanese, led by ICBC, which now operates in sixty countries. Even in capitalist Japan and Korea, generations-old family-run business conglomerates (keiretsu in Japan and chaebol in Korea) enjoy protections for domestic incumbents.13 In Korea, the ten biggest chaebol account for more than half the stock market’s value, with Samsung and its subsidiaries alone representing a third of the market.
Though most Asian economies are more open than China’s, they are taking lessons from China’s decades of state-capitalist experiments. One major takeaway is that investment-led growth is a winning strategy, even as it flies in the face of Western economic dogma. After China joined the World Trade Organization (WTO) in 1999, its share of GDP derived from exports jumped from 25 percent to 66 percent by 2006. To many outsiders, China has overinvested in industrial output and infrastructure to a fault, generating wasteful overcapacity and littering the country with unnecessary megaprojects. Additionally, China’s postfinancial crisis stimulus generated enormous debt, especially in the state-owned financial and industrial sectors, pushing total corporate debt to 170 percent of GDP.14 But industry and services are not an either-or choice. In fact, hot sectors such as e-commerce depend on the high-quality transportation infrastructure China continues to build. Today exports again represent less than 20 percent of China’s GDP and falling, while services represent more than half.15 There have been and will continue to be many defaults of Chinese companies in nonfinancial sectors, but they are timed to minimize the overall economic and social cost. The government’s interventions in credit and currency markets have thus delayed China’s recognition as a market economy, but China has managed to achieve macroeconomic stability and maintained a cash pile to use for the next stimulus surge—likely in advance of the 100th-anniversary celebration of the Communist Party in 2021.
Even with the rise of a strong entrepreneurial class, collusion between business and government is common in Asia. In China, the chairman of Fosun International, one of China’s largest conglomerates, headquartered in Shanghai and registered in Hong Kong, is an appointee to the Communist Party–run Chinese People’s Political Consultative Conference (CPPCC). Even a bootstrapping entrepreneur such as Jack Ma has drawn much closer to the Communist Party, which he has praised as a “clean and honest government,” even though it is widely considered the world’s largest billionaires’ club. In Asia’s large capitalist democracies—India, Indonesia, and the Philippines—giant family-run conglomerates still anchor major sectors such as construction, real estate, shipping, commodities trade, banking, and telecoms. The corporate pyramid remains narrow at the top, and tycoons have enormous influence over policy. The Arab and Iranian approach is also a strong mix of the state-capitalist and family conglomerate models, with ministries all but running the industries they regulate and wealthy families controlling key niches in construction, import-export, agriculture, and other areas.
A major reason for this is that private family business remains the backbone of Asian economies. One-fifth of the world’s five hundred largest family businesses are located in East Asia,16 with China and India having the largest number. Eighty-five percent of India’s companies are family businesses, representing two-thirds of GDP. The figures are similar for Malaysia and the Philippines. According to McKinsey, family businesses across the region have been growing at more than 20 percent per year over the past decade and using their strong cash positions to invest in joint ventures and new technology that raise the productivity of their home-based workers. Some might call this Confucian capitalism, recognizing the centrality of community—and it is as Chinese
as the notion of guanxi, or having privileged influence through networks.
Asia now accounts for 30 percent of the world’s billionaires, and India has more billionaires than any other country except the United States, China, and Russia. The Gulf countries, Iran, and Turkey add nearly one hundred billionaires to Asia’s tally. With 85 percent of Asia’s wealthy being first generation, the next two decades will witness one of the largest wealth transfers in history. Asia will soon have more billionaires and millionaires and a larger middle class than any other region. The wealth management industry is thriving in Asia as hundreds of new family offices set up in key cities, with banks often mere custodians. As one executive of a European bank put it, “In the US, American banks face little competition to service wealthy clients. In Europe, both European and American banks compete for the market. And in Asia, European, American, and Asian banks are all competing for wealthy customers. All our margins get squeezed, but at the same time it unlocks trillions of dollars of savings to be profitably invested.”
Not all of these funds are wisely invested, however. High-growth markets are often the most corrupt, and Asia is no exception. Vietnam, Thailand, India, and Pakistan have the worst corruption rankings in Asia (along with the poorer Myanmar). But the combination of economic pragmatism, more disciplined leadership, and a desire to please investors has converged around significant anticorruption efforts across the region. Whereas in the United States a CEO might destroy corporate value and take his winnings home as a golden parachute and in Europe executives might have to pay fines from their own incomes, in Asia corrupt officials and executives are finally going to jail or being exiled. In China, Xi Jinping’s anticorruption drive, despite its political motivations, has tightened the enormous leakage of capital stashed away by party officials and private tycoons. In South Korea, Samsung heir Lee Jae-yong was convicted and jailed in 2017 for making donations in exchange for merger approval, while president Park Geun-hye was impeached that same year and then convicted in 2018 on corruption charges and sentenced to twenty-four years in prison. Across ASEAN—most recently in Thailand and Malaysia—leaders have been sacking ministers for taking kickbacks, independent anticorruption investigative divisions are being allocated more resources, and corporate governance scorecards are being released to the public. India’s prime minister Modi has cracked down on fuzzy accounting and offshore shell companies, while in Pakistan, the Panama Papers revelations forced Pakistan’s prime minister, Nawaz Sharif, to resign in 2017.
As Asia gradually evolves from economies based on relationships to ones governed by rules and institutions, authorities will continue to steer markets toward national development. This is because Asians widely hold the view that markets should be subordinate to overall societal well-being, rather than held up as ends in themselves. Unlike in the West, Asian societies remain proglobalization because their governments are actively steering it in their favor. From India to Vietnam, surveys show support for globalization topping 80 percent (compared to less than 40 percent in the United States and France). The figures are similar when it comes to support for capitalism—which is ironic given the socialist history of major Asian nations. Rising antifinance and anti-high-tech sentiments in the United States are indicative of an ideological convergence toward the Asian point of view that banks and tech giants should not be allowed free rein to exploit consumers. Rather, they should be subservient to the state and serve broader societal needs, whether fiscal stability, job creation, infrastructure upgrading, skills training, or other objectives. The more Western governments bail out and prop up industries such as finance and manufacturing, the more their systems come to resemble Asian-style capitalism in practice, if not in theory.
Related to this, Asians learned in the 1990s to be suspicious of Anglo-American-style deregulated financial capitalism. Instead, they subscribe to the view that fiscal redistribution drives equitable growth, rather than the orthodox capitalist view that growth in itself results in redistribution. According to the IMF, reducing inequality requires higher taxes and more public investment, not less. Many Asian countries are therefore not hesitating to use macroeconomic levers such as lower interest rates, countercyclical investment, aggressive public spending, and higher taxes to promote greater equity and create jobs. Good public transportation, housing, electricity, sanitation, and other basics are crucial to a decent quality of life. Economic reforms cannot come at the price of high unemployment and social cohesion. China’s government worries about the fate of workers displaced by robots and the profits that will accrue to firms that can cut head count while boosting output—but rather than let them offshore billions in profits, it taxes and takes shares in them to raise capital from their growth. Indonesia is steadily expanding its tax-to-GDP ratio to reach 20 percent by 2020.17
Asians have also taken on board IMF recommendations of “macro-prudential measures” such as the Basel III regulations that require high bank-deposit-to-lending ratios, sound loan-to-value ratios in property markets, and preferential lending to small and medium-sized enterprises (SMEs)—all steps that have helped Asians graduate from IMF support and protect themselves from the financial domino effects of crises generated elsewhere.18 Meanwhile, the United States and numerous Western economies ignore the IMF wisdom they once dispensed. Yet Asian interest rates now move more in tandem with one another than with that of the United States, allowing them to push on with monetary and fiscal coordination. When Asian countries such as Turkey need strategies to contain inflation and stabilize their currencies, they look to India and Indonesia. The United States is gradually learning to move beyond its fixation on interest rates and focus more on boosting investment. In the words of the former UBS banker and LSE risk management professor Lutfey Siddiqi, “We are all Asians now.”
From Underwriting the United States to Financing Asia
Foreign capital from the United States and Europe was a critical driver of Asia’s economic ascent during the first and second waves of East Asian growth, from Japan’s economic miracle to China’s breakneck industrialization. East Asians then lent their prodigious savings to the United States and Europe in the form of buying their Treasury bonds. Asian capital thus became a driver of the US dollar’s stability and status as a global reserve currency. China and Japan remain the two largest foreign holders of US Treasuries, with more than $1 trillion each, and Hong Kong and Taiwan also rank in the top ten with nearly $200 billion each in US dollar reserves. All of the top ten foreign holders of US dollar reserves—including Saudi Arabia, South Korea, India, and Singapore—are Asian economies, collectively holding more than 55 percent of US Treasuries.19
Furthermore, Asian foreign investment in the US economy, led by Japan, totals more than $1 trillion (compared to Europe’s $2 trillion FDI in the United States), especially in industries such as energy, manufacturing, and real estate. Asian investors have helped keep oil pumping in the shale patches of Texas when prices slumped. Both the China Investment Corporation (CIC) and Korea Investment Corporation (KIC) allocate more than 50 percent of their public equity portfolios to US equities, and GIC Private Limited of Singapore (formerly known as Government of Singapore Investment Corporation) invests 34 percent of its assets in North America. Asian financing will also be essential to underwrite the long-term debt needed to fund the United States’ infrastructure renewal. Saudi Arabia’s Public Investment Fund (PIF) committed $20 billion to a $40 billion Blackstone fund devoted to US infrastructure.
Yet a great diversion of capital is under way as Asians refocus on investing in Asia (and Europe) rather than in the United States. Amid mounting bilateral tensions, Chinese investment in the United States fell by 90 percent in 2018. And as the United States’ debt rises and Asian trade within Asia and with Europe grows far faster than that with the United States, Asians’ appetite for US Treasuries is waning. As their societies age and their savings rates come down, East Asian countries’ purchases of US Treasuries have plateaued. Arab central banks have been selling doll
ars to prop up their reserves, stimulate the domestic economy, and fund transitions away from oil dependence.
Instead of underwriting the US dollar, Asians are gaining confidence in investing in their own debt and capital markets. For decades, most Asian nations (with the notable exception of Japan) lacked sufficiently mature financial markets to absorb the region’s enormous savings, which were instead recycled into London and New York. But the financial crisis laid bare how much US banks rely on financial engineering rather than underlying fundamentals to generate growth. For their part, Europeans feel burned by their purchases of US subprime mortgage debt and are less inclined to borrow short-term US dollars only to recycle them back into US consumer debt, plus they still need to worry about their own banking sector’s solvency. Asian economies have managed to ride out the past decade of Western financial volatility and rising US interest rates. Each time the United States has raised interest rates, Western economists have predicted a “taper tantrum” in Asian currency markets. But these portfolio-capital outflows don’t disturb the enormous and growing availability of capital for Asians to borrow.20 Asians have spent two decades building currency swap lines to enhance their access to liquidity in the event of crisis.21 These efforts have made available trillions of dollars’ worth of liquidity for central banks to use as a cushion should the need arise.
