What tensions does Asia face?

>> Why didn't the financial crisis occur?

But is this all a storm in a teacup? Steve Barrow, Head of Standard Bank G10 Strategy, thinks it is, but the situation still needs watching closely.

There are undoubtedly considerable pressures on Asian countries. There are competitive pressures arising from the 25% fall in the yen’s effective exchange rate since the outbreak of COVID-19. And while Asian currencies might have gained competitiveness against the US dollar given the greenback’s rise, the adverse financial effects of the rise in the US dollar and US rates tend to dominate given that over three-quarters of South-East Asian countries international borrowing is denominated in the dollar.

The weakness of the Chinese economy has been a burden as well, although some have benefited in a small way from this, like Vietnam, as some supply chains to Western developed nations have been re-routed to these countries and away from Beijing because of trade/political sensitivities. As often happens, some are looking at these pressures and comparing them to the build-up to the Asian financial crisis in 1997 which was led by Thailand’s decision to devalue and followed by many others.

The result was that Asian currencies fell by around 70% against the US dollar in a period of just over six months from mid-1997. But are these alleged similarities sufficient to think that the region, and perhaps other EM’s stand at the edge of another currency swallow dive?

Steve Barrow tends to think not for a number of reasons. One of these is China, which may seem like a strange thing to say given that the economy has weakened and financial strains, particularly in the property sector, have mushroomed. But China’s emergence means that the situation is very different from 1997. Back then, China accounted for somewhere around 2% of global GDP; today, it is close to 20%. And, as China has risen, so has the weight of the renminbi in the effective exchange rate indices of Asian countries. Hence weakness against the US dollar arguably does not mean as much today as it did back then.

Another point is that China’s rise has seen the development of a Beijing-led safety net for many countries in the region, and that’s in addition to the currency swap lines introduced between Asian nations after the 1997 crisis. Swap arrangements between China and other countries in the region are important not just because they can offer temporary liquidity but also because the very existence of such support, which is partly designed to encourage the wider use of the renminbi as an international currency, presumably puts pressure on Beijing not to devalue the currency.

>> Global economy is in a precarious position

Now, of course, if push comes to shove and the economy falls into both a growth and property-driven financial crisis, then devaluation might be the wisest course of action, even if it does undermine credibility within Asia. It goes without saying that a significant renminbi devaluation on top of the yen’s slump would likely put intolerable pressure on other Asian currencies and would probably spread to the rest of the EM landscape, but this is not our assumption.

If Asian currencies were likely to crumble under the weight of things like the weak yen and high US rates, they would have probably done so already. And right now, we’re seeing the BoJ intervene to limit  yen weakness while there is speculation that US rates won’t rise again, and will likely be cut before the end of the year. In essence, it looks as if the factors that might have put pressure on Asian currencies are already past their peak point.

Going forward, if we can look to lower US rates, a falling dollar, and a recovering yen, the pressure on Asian currencies should ease. Of course, there could still be bumps in the road, or mini-storms in teacups, but Steve Barrow’s view remains that the current situation is not indicative of an Asian currency crisis mark II.