Asia needs to address legacy problems

Author: | Published: 30 Oct 2017
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While a repeat of the 1997 financial crisis is a possibility, it's an unlikely one. 'Asia is much better equipped, much more advanced now, and much more resilient,' IMF Asia-Pacific department director Changyong Rhee recently told Chinese media Xinhua.

He is correct on a number of points. A number of countries in the region – led by China and Japan – have reported ever-expanding levels of foreign exchange reserves, and also focused on reducing public deficit and debt. International trade to and from the region is also expanding, with increased exports to the US and Europe, and higher levels of investment and consumption. Initiatives including China's Belt and Road programme have helped boost infrastructure and trade development in the region as well as globally, and its Bond and Stock Connects are promoting better financial integration with neighbouring financial powerhouse Hong Kong.

But in a number of ways, in spite of progress having been made over the past 20 years, the region is still vulnerable to economic and financial fluctuations. China, primarily, is a key vehicle for instability though Japan is going down the same path.

Many reports that the PRC giant is facing a banking and financial crisis of epic proportions have blossomed in the past year or so. The Bank for International Settlements warned last year the country was heading for a meltdown because of the amount of credit in circulation reached over 200% of GDP, a rise of over 100% since 2010. Corporate debt is believed to be at 170% of GDP. In total, outstanding loans have reached nearly $30 trillion, which is 10 times the GDP of Germany and 15 times that of the UK. Of that amount, non-performing loans account for nearly 10%. And just like in other jurisdictions with bad loan problems, investors are buying them, but primarily local investors, which means the problem is never diffused internationally because it never leaves the local economy.

China also has another problem on its hands, in some ways linked to the first: its so-called zombie companies, which are state-backed entities that are constantly in debt or that need constant bailouts just to operate. There is some work carried out to address these – notably via a ban on these entities issuing debt-to-equity swaps – but this is nowhere enough to tackle a problem of that size.

Neighbouring Japan has been promoting an interventionist approach to keep public debt and inflation down, which has led to government bonds yielding negatively. But it also has to contend with its own issues: an over-reliance on the banking sector, an accumulation of household wealth in cash and deposits, and a rapidly ageing population.

While the region is growing economically and in some respects financially, a lot of work needs to be done to address legacy issues, just like in Europe. Let's hope it's not back to square one for these economies.