The Myth of Asia Remaining the Strong Part of the World Economy

Many predicted that Asia would remain the strong part of the world economy. It is true that some Asian export countries including China have enjoyed the U.S. stimulus inspired demand. Yet, is China really the new rising sun and would the general public in the Asian economies prosper in the midst of a global economic slowdown?

As I have pointed out, some of the data points like the HSBC PMI have suggested a caution over Asian exports. Some Asian countries are experiencing monetary inflation and asset bubbles. Hot money inflows have caused (will cause) many repercussions. They could create great harm.

Some Asian countries may have to deal with the consequences of a bubble burst and capacity overhang, although some seem to take steps to avoid the preconditions of a bubble economy.

China seems to be not playing ball with the Western financial engineers, but will they be able to fend off its dwindling exports and bubbles?

As I recently pointed out, some Asian economies would likely to join the QE crowd. They have engaged in their particular version of extend and pretend. One has to wonder whether they are committing the same mistakes as the Western economies like misallocation of resources.

For some countries both in the East and West, structural defects have added rather than removed as they have undergone the bubble burst and financial crisis. For one example, the debt levels in countries like the U.S. and Japan have increased. In the U.S., Japan and Korea, their manufacturing base has been lost with their operations shipped to China. Their middle class has been shrinking and income inequality is widening.

After all, the U.S. carries the world’s largest sovereign debt. Their QE policy won’t revive their real economy. Their consumption likely won’t be coming back. The U.S. has been the prime export market for many Asian export economies. Hence, dwindling U.S. consumption would definitely hurt their economies.

Despite a real estate bubble and other potential problems, China is the biggest creditor of the entire world. Although the middle class base in China may be expanding over the years, there is a tiny fraction of people reaping the benefits of their new economy. Will China ultimately take the place of the U.S.?

Much would depend on another round of the U.S. QE and the Chinese economy. Some Asian countries including Japan and Korea seem to have realized that they have no choice but to come to terms with China.

As much as the American political economy would be the determining factor in unfolding economic/political events, the Asian countries’ political economy would matter much.

How will the dynamics of globalized economics unfold? In the worst case, how would the Asian countries cope with a flood of U.S. sovereign insolvency when it happens?