The recent strong global impact of weakness in the Chinese economy has made it clear that China is now a powerful economic force. Other Asian countries such as India, Japan, and South Korea are also strong, and the region’s ascendancy in the global economy is likely to continue.
In September, after much deliberation, the US Federal Reserve (Fed) decided to keep the federal funds rate on hold. The decision to postpone a rate hike was primarily due to concerns about growth in key emerging economies and volatility in global financial markets.1 A string of poor economic data from China and an equity sell-off there in Q3 had indeed raised risks to global growth. What was an eye-opener, however, was the strong impact of Chinese data on global markets, including the Fed’s decision to defer a rate hike. The latter made one thing very clear—China is now a powerful force in the global economic order.2
The more one looks at Asia, the clearer it becomes that the region’s ascendancy in the global economy will continue, providing strength and yet creating instability if risks are not addressed prudently.
China’s rise is yet another feather in the cap of Asia’s massive economy. Once a poorer cousin of the United States and Europe, Asia now boasts some of the world’s fastest-growing economies and is a major contributor to global growth (see figure 1). In addition to China and its neighbor, India, Asia also has a former powerhouse in Japan, an increasingly affluent South Korea, and the fast-growing Association of South East Asian Nations (ASEAN). In fact, the more one looks at Asia, the clearer it becomes that the region’s ascendancy in the global economy will continue, providing strength and yet creating instability if risks are not addressed prudently.
A key factor behind Asia’s rising influence is the size of its economy. In 1990, Asia’s share in world GDP in real US$ purchasing power parity (PPP) was 23.2 percent. By 2014, this went up to 38.8 percent, much larger than the shares of the United States and the European Union.3 In fact, Asia’s share is likely to go up in the coming years if current growth trends in key regional economies continue. For example, forecasts by Oxford Economics put Asia’s share at nearly 45 percent by 2025 (see figure 2).4
Interestingly, there are major changes within Asia itself. In 2014, China’s share in Asia’s GDP (in real US$ PPP) was 43.1 percent, more than double its share in 1992. In contrast, Japan’s share fell sharply during this period. Oxford Economics’ forecasts show that this trend will continue (see figure 3).5
For companies in the West, Asia has served as a factory. First, it was Japan. Then came countries like South Korea, Singapore, and Taiwan. Finally, China made its presence felt. In fact, Asian economies have benefitted immensely by being part of global value chains (GVCs). Moreover, as certain countries moved up the value chain over time, others in the region occupied the space left vacant. Data from the Organization of Economic Cooperation and Development’s (OECD’s) Trade in Value Added (TiVA) database show that Asian countries have become ever more integrated with GVCs, thereby pushing up global trade, investments, and development (see figures 4 and 5).6
Within Asia itself, there are now strong production links. For example, Japanese carmakers have hubs in countries like Thailand, China, and India. These links have become stronger due to the rapid growth of regional economies, thereby providing large markets to global firms. For example, in 2010, China overtook the United States as the world’s largest auto market.7 Asia is now a key part of the growth strategies of multinational corporations (MNCs), ranging from banks to technology companies. For example, in the financial year ended September 2015, 24.2 percent of Apple Inc.’s revenues came from China, more than double the share in 2011.8 When the downturn of 2008–09 dented Western economies, banks like Standard Chartered were able to escape the worst of the crisis by betting on emerging markets in Asia and Africa.9
Given the expected rise in affluence and the numbers of the middle class, Asia’s role in global demand is set to increase further (see figures 6 and 7).10 Greater integration within the region (such as the ASEAN Economic Community) and trade agreements with global growth centers (like the Trans-Pacific Partnership) will only add to the lure of the Asian market.
Interestingly, Asia’s large contributions to global supply and demand have not benefitted foreign firms alone. Links to GVCs have helped Asian companies attain global center stage as well. In 2015, there were 190 Asian companies in the list of global Fortune 500 companies, up from 116 in 2001.11
Asia’s influence is arguably the greatest on commodity markets. A few decades ago, demand from the United States was the key driver of oil prices. Not anymore. Surely, the supply of US shale has a key role to play in global oil markets, but equally important is demand from emerging economies, led by China. According to data from the US Energy Information Administration (EIA), the Asia-Oceania region is now the world’s leading consumer of petroleum and other liquid fuels (see figure 8).12
Increasing demand from Asia has contributed to growth in non-oil commodity-producing nations as well, especially those rich in iron ore, copper, and coal. Nowadays, the fortunes of commodity producers such as Brazil, Chile, and Indonesia are increasingly dependent on demand from emerging Asian countries, rather than the West alone (see figures 9 and 10).
Asia’s rush for commodities has also led to rising investments in resource-rich economies in Africa and Latin America. A number of commodity producers are also diversifying away from Western markets to growth centers in Asia. Russia’s major oil and gas deal with China in 2014 was as much a strategy to tap new demand sources as it was geopolitical grandstanding with the West.13 Iran has managed to retain India as a major client despite sanctions, and is aiming to build pipelines between the two countries. Even Gulf Arab countries are pushing hard to preserve and expand market share in Asia.14
While Japan and a few affluent nations in South East Asia have always been a part of global investors’ calculations, there is also a trend of increasing focus on fast-growing emerging economies in Asia. As a result, major global equity, bond, and currency markets are more interlinked with Asia now than ever before. This relationship is, however, not a one-way street, where events in the West impact Asia. Nowadays, movements in Asia have started impacting major markets in the West more profoundly. For example, currency weakness in Asia due to uncertainty over a Fed hike has dented the overseas dollar revenues of US corporations this year, thereby weighing on stock prices. Then again, when the bull run in Chinese stocks ran out of steam in June, the impact was felt across the world (see figure 11). And as the Fed makes its intentions clearer, investor focus has yet again shifted to emerging market growth, especially China.15 Ironically, within Asia, financial markets have become more interconnected due to growing trade and investment links within the region. When China devalued the yuan in August to free up the currency—a move praised by the International Monetary Fund—it created a flutter among other emerging market currencies, including Asian ones (see figure 12).
Rising economic and financial links within the region and outside have ignited much debate on the need for more economic reforms in Asia. For example, China’s attempts to develop a domestic demand-driven economy will not bear fruit without financial market reforms. In Japan, structural bottlenecks will not go away without changes in the labor market, agriculture, and corporate governance. India’s attempt to attract global investments will fail without reforms to the tax regime and easier business conditions. And in South Korea, concentration of economic power in a few firms cannot be remedied without sprucing up SMEs and entrepreneurship.
Are Asia’s policymakers ready to match rhetoric on reforms with action? Are the region’s giant emerging economies prepared for global economic leadership through more open and globally integrated financial systems including floating currencies? Will any sudden reforms by one country without information symmetry with global markets lead to short-term vulnerabilities (like the yuan devaluation in August)? Will Asian policymakers be able to broaden their focus to a more global one given the region’s rising role in the world economy?
These are only some of the questions that will be asked of Asia’s leaders as the region continues to progress. As they lead efforts to set up global development banks, fight climate change, and increase their presence in world bodies like the United Nations, Asian countries will have to collaborate more. Only then will Asia’s rise be a more credible one, helping to create a more stable world order, both economic and political.
The author of this article would like to acknowledge the contribution of Aijaz Shaik Hussain. Aijaz is an executive manager with Deloitte Services India Pvt. Ltd.