The West gradually has less influence on the Asian economy

The new era of trade and investment in Asia will focus on within the bloc and less towards the West, according to the Economist's forecast.

Seven hundred years ago, maritime trade routes stretching from the coast of Japan to the Red Sea were filled with Arab (present-day Gulf), Chinese and Javanese (present-day Indonesia) sailing ships.

At the center of the routes, a trading post called Singapura (Malaysian, today Singapore) flourished. This huge intra-Asian trade network was only upset by the arrival of sailors from European empires, creating demand from commodity markets further outside Asia.

Today, the threshold for new economic change in this area has once again formed. The "Asian Factory" model of the late 20th century, where the continent produced products for American and European consumers, provided a strong growth engine for the prosperity of China and Japan. , Korea and Taiwan.

In 1990, only 46% of Asia's trade in goods took place within the bloc, with the majority flowing to the West. But by 2021, intra-bloc trade accounts for 58%. Accompanying that is the increase in capital flows that bind Asian countries more closely together. A new era of Asian trade has begun, which will reshape the continent's economic and political future, according to the Economist .

Jakarta-Bandung high-speed train route on June 27 in Indonesia. This is the fastest highway in Southeast Asia with a speed of 350km/h, developed by Chinese businesses, under the Belt and Road initiative. Photo: CFP

The 1990s saw the development of complex supply chains, first in Japan, and then in China. Along with that, Asian investors now account for 59% of intra-bloc FDI capital, up from 48% in 2010. This figure excludes financial centers including Hong Kong and Singapore.

In India, Indonesia, Japan, Malaysia and Korea, the proportion of intra-regional FDI increased by more than 10 percentage points, from 26% to 61%. After the 2007-2009 global financial crisis, cross-border banking also became more Asian.

Before the crisis, banks in this region accounted for only about a third of foreign lending in Asia. But now they account for more than half. Taking advantage of the retreat of Western financiers, China's giant state banks are leading the charge.

Industrial and Commercial Bank of China's foreign loans more than doubled from 2012 to 2022, to $203 billion. Japan's megabanks also expanded abroad to escape narrow profit margins at home, similar to Singapore's UOB and OCBC.

In a recent survey of Southeast Asian researchers, businessmen and policymakers by the Iseas-Yusof Ishak Institute (Singapore), 32% of respondents said they thought the US was an influential political power. most in the area. However, only 11% think the US is the most influential economic power. Meanwhile, China's capital flows from the Belt and Road initiative or investment activities of Japan and Korea attract more attention.

This trend is likely to accelerate. Due to frosty US-China relations, companies that rely on Chinese factories are looking at alternatives in India and Southeast Asia. But few plan to leave China entirely. This means the formation of two large supply chains in Asia, meaning investment will double.

Trade agreements will accelerate this process. A study published last year found that the Regional Comprehensive Economic Partnership (RCEP), signed in 2020, will increase investment in the region. In contrast, because the US abandoned the Trans-Pacific Partnership (TPP) trade agreement in 2017, Asian exporters have little opportunity to gain greater access to the US market.

Ms. Sabita Prakash, Director of ADM Capital, said that the need to establish new supply chains makes the transportation and logistics industry a promising field for intra-Asia investment. Connecting investors looking for solid returns and projects looking for financing, private credit companies are likely to benefit. From 2020 to mid-2022, the size of the private credit market in Southeast Asia has increased by about 50%, to nearly 80 billion USD.

Other major investors are also turning to pour money into infrastructure. GIC, Singapore's state investment fund, which manages part of the island nation's foreign exchange reserves, is spending heavily on building a new supply chain.

Overall, China, Hong Kong, Japan, Singapore, South Korea and Taiwan have risen to the ranks of the world's largest foreign investors. These richer and older parts of Asia have launched significant amounts of capital into intra-bloc countries, along with cash from trade links.

In 2011, richer and older countries in Asia invested about $329 billion (in today's prices) in younger and smaller economies such as Bangladesh, Cambodia, India, Indonesia, Malaysia, Philippines and Thailand. A decade later, that number had increased to $698 billion.

In India and Southeast Asia, urbanization is ongoing and capital will follow those trends, according to Raghu Narain, head of investment banking at Natixis. Larger cities require not only more investment in infrastructure but also new companies better suited to urban life.

According to Mr. Narain, cross-border mergers and acquisitions (M&A) activities in Asia are changing. Even as deals in China have slowed significantly, M&A activity is still bustling elsewhere. Japanese banks, facing low interest rates and a slowing domestic economy, are hungry for deals. Over the past year, financial groups Sumitomo Mitsui and Mitsubishi UFJ have acquired financial companies in Indonesia, the Philippines and Vietnam.

Meanwhile, growing consumption in Asia makes it a more attractive market. According to research firm World Data Lab, of the 113 million people expected to join the global consumer class next year (spending more than $12 per day adjusted for purchasing power), about 91 million will be in Asia. .

Even if China's income growth slows, other countries will accelerate. Southeast Asia's five largest economies, including Indonesia, Malaysia, the Philippines, Singapore and Thailand, are expected to increase imports by 5.7% per year from 2023 to 2028, the fastest rate of any region. any.

Closer trade links will tie the business cycles of Asian economies even further together. Despite the longstanding use of the USD in cross-border transactions and the continued pursuit of access to Western equity markets by Asian investors, a study by the Asian Development Bank (ADB) in 2021 concluded that Asian economies are now more vulnerable to spillovers from economic shocks in China than the US.

This has been demonstrated in recent months as China's trade slowdown affected exporters in South Korea and Taiwan. The United States will maintain influence over Asian security but its economic importance will decline. Businessmen and policymakers will be more interested in and more likely to cooperate with neighboring countries than customers and more distant countries, according to the Economist .