Against the
current backdrop of high inflation, energy shortages and weak economic growth
prospects, future economic development in Asia will face a number of
uncertainties, such as weakening external demand, rising trade protectionism in
some countries, tightening global liquidity, insufficient international
investment and challenges to intraregional cooperation.
I. Foreign trade and economic growth under pressure
Global economic downturn and continued weak external demand will weigh on growth of major Asian exporters. Most Asian economies have an outward-looking or export-led economic development model, where economic development is highly dependent on external trade and exports are a key factor in driving domestic economic growth and business investment. The overdependence of economies on export trade has resulted in the vulnerability of economic growth to global economic cycles. Experience over the past 40 years has shown that the growth rate of export trade in emerging Asian economies is highly positively correlated with global economic growth, with a correlation coefficient of up to 0.5 between the two (figure 1). With the deterioration of the global economic growth situation, the trade of major Asian exporters will continue to be under pressure. The IMF expects the global economic growth rate in 2023 to be around 2.5% (market exchange rate method), a decline of 0.5 percentage points compared with that in 2022, and the economic growth rate will be further reduced to 2.4% in 2024, the third consecutive year of decline. The global economic downturn and weak commodity demand will have a significant impact on export-oriented economies such as Asia-Pacific, where export orders are likely to continue to decline and the momentum of economic growth will be weakened.
Figure 1 Relationship between export trade growth and global economic growth in emerging Asian economies（%）
Source: IMF, China Banking Research Institute.
In addition to continued weak demand, intra-Asian industrial value chain cooperation is likely to grow at a slower rate after rapid growth, and become less supportive of economic growth. Since the 21st century, promoted by ASEAN and China-Japan-Korea cooperation and RCEP and other economic and trade agreements, the degree of Asian economic integration has increased rapidly, intra-regional economic and trade cooperation has gradually heated up, and countries have gradually formed a relatively close intra-industry labour division system, with the trade of intermediates occupying a larger proportion of the trade exchanges between Asian countries. Currently, intraregional trade in Asia accounts for about 60% of overall trade, second only to the European Union and higher than that in North America, Latin America, Africa and other regions. Over the past decade, intra-regional trade growth accounted for more than 50 per cent of total export growth in emerging Asian economies, while incremental exports to the EU, Japan and the United States accounted for about 30%. China is at the center of Asia's industrial value chain, and economic and trade exchanges with China have been a key driver of growth in each country, with the ASEAN-China trade corridor becoming one of the world's major trade corridors. Intra-Asian consumer markets are also expanding rapidly, and intra-regional trade, in addition to reflecting changes in production patterns and adjustments in the division of labor in the industrial chain, is also underpinned by the internal absorptive capacity of final products. World Bank data show that in 2000, for every dollar of export value created in emerging Asian economies, only about 12 cents ultimately met intra-regional consumption and investment demand, and today that ratio has risen to over 30 cents. It is evident that the division of labor and demand for final products within Asia is of great importance to the economic growth of each country. However, according to IMF forecasts, in the next five years, the economic growth momentum of emerging economies in Asia will gradually be weakened, GDP growth will decline from 5.3% in 2023 to 4.4% in 2028, the slowdown in economic growth, the fall in domestic demand and the weakness of external demand will lead to a slowdown in the growth of intra-regional demand for intermediates and final goods, weakening the momentum of growth in the economies of countries.
At the policy level, rising trade protectionism in some Asian countries will limit intra-regional trade flows. Although the degree of regional economic integration represented by the RCEP is on the rise, protectionism is heating up in some Asian economies. In August 2023, India announced restrictions on imports of some electronic products such as laptops, tablet PCs and all-in-one PCs. Foreign brands occupy most of India's electronics market, and this restriction will have a large impact on exports of related products, including Chinese electronic equipment manufacturers. Japan, South Korea followed the United States to introduce restrictions on semiconductor exports to China, China as Japan and South Korea's largest trading partner and Asia's largest importer, the relevant countries trade protectionist policies and the resulting countermeasures will seriously affect the East Asian region within the trade exchanges.
II. Weak international investment might slow Asia's growth
As an export-oriented economy, Asia's economic growth is highly dependent on exports and capital inflows from abroad. As global liquidity continues to tighten, the pace of cross-border investment inflows is likely to slow down. Since 2022, global liquidity has gradually reached an inflection point as the central banks of major economies in Europe and the United States have implemented initiatives such as significant interest rate hikes and balance sheet reductions. As of the end of August 2023, the size of the balance sheet of the world's major central banks, including the Federal Reserve, the European Central Bank (ECB), the People's Bank of China (PBOC), etc., added up to USD 30.1 trillion, a year-on-year decline of 7.3%. Among them, the ECB declined by 18.3% year on year and retreated by 1.7 trillion euros (about 1.8 trillion U.S. dollars) from its 2022 high; the Federal Reserve's balance sheet declined by 8.1% year on year and retreated by $826.4 billion from its 2022 high. The New York Fed expects the Fed's balance sheet contraction to continue, projected to fall back to $5.9 trillion by mid-2025, a cumulative reduction of more than $3 trillion from the previous high of $9 trillion. The ECB's balance sheet is expected to shrink to €6.15 trillion by the end of 2024, down €2.6 trillion from its 2022 high.
As the balance sheets of major global central banks continue to shrink, the size of foreign direct investment, venture capital, and cross-border bank credit flows into Asia is expected to decrease. Crunchbase data shows that the amount of startup funding in Asia has fallen from more than $73 billion in the first half of 2022 to $36.3 billion in the first half of 2023, and the number of deals has fallen from 5,402 to 3,237, declined by 50% and 40%, respectively. International currencies such as the US dollar and the euro are the main currencies used by Asian companies for offshore financing, and the cost of financing has risen significantly as major central banks in Europe and the US are now gradually raising interest rates to restrictive levels. Given that inflationary pressures remain in Europe and the US, interest rate levels may not come down significantly until at least 2024. Tighter cross-border liquidity, higher financing costs and increased pressure on debt repayment will cause companies to reduce the scale of their international financing.
Increased volatility in economic growth in some economies will also limit international capital inflows. In the next few years, emerging economies in Asia will face continued economic downward pressure, the return on investment projects may be reduced, the investment risk will be magnified, and the enthusiasm of foreign capital investment may suffer a certain impact. To attract more foreign investment in China, India and other economies, for example, in the first seven months of 2023, China's actual use of foreign capital scale of 111.8 billion U.S. dollars, a year-on-year decline of 9.8%; in the first half of year, foreign capital scale attracted to India fell by 26.4% year on year, if the withdrawal of capital is taken into account, the net decline in foreign direct investment is as high as 58.2%. In 2024, unless the economic outlook has been significantly improved, the related trends are likely to continue.
III．Challenges to intra-regional cooperation
The impact of competition among major powers on economic and trade cooperation among Asian countries has deepened, exacerbating the uncertainty and difficulty of cooperation. The Asian region has a large population and a vast territory, and the major powers have different economic interests and development aspirations, as well as a number of historical legacy issues and territorial disputes between them, which have affected the depth and breadth of cooperation. In recent years, the United States and the West, led by the United States, has increased its commitment to the Indo-Pacific strategy and exerted constant pressure on cooperation within the region, leading to an increasingly complex geopolitical pattern in the Asian region and bringing negative impacts on regional cooperation and economic integration.
The US actively promotes the Indo-Pacific Economic Framework (IPEF) in an attempt to create a "De-Chinaisation" supply chain with other Asia-Pacific countries. In May 2023, the U.S. government announced agreement on negotiations for a supply chain agreement for the Indo-Pacific Economic Framework, with the central aim of creating a set of supply chain mechanisms outside of China.There is a tendency for some labor-intensive enterprises in China and foreign-funded enterprises set up in China in the past which belong to the American and Western countries to shift their industrial chains to regions such as South-East Asia, South Asia, Mexico and Eastern Europe, in an attempt to diversify so-called supply chain risks. Japan, South Korea, India and other Asian countries are also gradually following the United States in strengthening restrictions on OFDI and implementing more stringent investment review measures. For example, India has imposed huge fines on many headline Chinese enterprises operating in India through measures such as increased tax and compliance reviews, affecting the investment confidence of Chinese enterprises in India. The reshaping of the "de-Chinaisation" industrial chain will affect the depth of cooperation in the Asia-Pacific region and raise the cost of intra-regional flows of commodities, capital and other factors of production.
As the U.S.-China rivalry continues and the U.S. containment strategy against China intensifies, South Korea, as a U.S. ally, is faced with the problem of choosing between the U.S. and China. After South Korea's current president, Yun Seok-hyeol, came to power, his policies have gradually tilted towards the United States, and he has continued to strengthen the cooperation between the United States, Japan and South Korea, which has led to a gradual cooling relationship between China and South Korea. In the first half of 2023, exports to China accounted for 23.2% of South Korea's total exports, down 1.9 percentage points from the same period in 2022. In August 2023, the United States, Japan and South Korea issued a Joint Statement at the Camp David Summit, deciding to hold a tripartite multidisciplinary joint military exercise; and Japan has forcibly pushed for the discharge of nuclear-contaminated water into the sea in defiance of opposition from many parties. The irresponsible actions of Japan and South Korea have further led to a lack of mutual trust between China, Japan and South Korea, exacerbating regional tensions and affecting peace and stability in the Asia-Pacific region, as well as the basis for economic and trade cooperation among East Asian countries.
Influenced by the U.S. semiconductor suppression policy towards China, the Asia-Pacific semiconductor industry chain segmentation is becoming increasingly prominent. In August, 2023, U.S. President Joe Biden signed an executive order restricting U.S. investors from investing in China's three major high-tech fields of semiconductors and microelectronics, quantum information technology, and artificial intelligence, which further drove U.S. semiconductors and other high-tech enterprises to withdraw from China. Japan and South Korea gradually followed the U.S. to tighten export restrictions on semiconductor products to China, Japan's exports of cutting-edge semiconductor manufacturing equipment to implement controls on 23 categories of products included in the export management restriction list. Taiwan, China's important semiconductor manufacturers TSMC has been lured by the United States threats and financial subsidies to invest in the United States to build factories to produce high-performance chips. China's semiconductor suppression policy is expected to produce obstacles to economic and trade exchanges among Asian countries, limiting normal economic and trade activities, and future scientific and technological cooperation in the field of semiconductors in Asia and the industrial chain docking will suffer a greater impact.
Expert Biography
Chen Weidong, Director Fellow of Asian Financial Cooperation Association Think Tankers Committee, General Manager of the Research Institute, Bank of China. Dr. Chen joined the Bank in 1999, and was closely involved in the IPO of Bank of China Hong Kong Limited and the restructuring and IPO of the Bank. From 2005 to 2011, Dr. Chen was the Deputy General Manager of the Strategic Development, Bank of China. From 2011 to 2014, he served as the Vice President of Bank of China Liaoning Branch. From 2014 to 2019, Dr. Chen served as the Executive Deputy Director and the Director of the Institute of International Finance, Bank of China. Dr. Chen is also the Secretary General of the China International Finance Society since February 2015, and the chief editor of the journals of Studies of International Finance and International Finance since July 2014.He graduated from the International Economy Department, Renmin University of China with a Ph.D. in economics in 1997.
Liao Shuping and Wang Youxin also contributed to this article.
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