Asia Better Equipped to Weather Financial Storms

Asia, the fastest-growing region in the world, has become much more resilient to weather financial storms with lessons learned from the Asian financial crisis 20 years ago, said a senior official at the International Monetary Fund.

“Asian economies have become much more resilient because of the lessons learned from the Asian financial crisis started in the summer of 1997,” said Changyong Rhee, a well-respected economist and director of the Asia Pacific Department at the IMF.

“Now we understand the risk from the double mismatch problem, you know the maturity mismatch and the currency mismatch, and now we understand how to use flexible exchange rates as a shock absorber,” Rhee told Xinhua in an interview on the sidelines of the annual meetings of the IMF and World Bank.

“I think many Asian countries learned a lot,” he said, citing currency account surpluses, high levels of foreign exchange reserves and much better fiscal consolidation in many Asian economies.

However, Asia “should not be complacent,” as credit expansions in the region after the 2008 global financial crisis are “quite rapid” and there are several frontier and developing Asian economies which haven’t experienced the Asian financial crisis, according to Rhee.

“I wouldn’t say that Asia is completely immune from the possibility of a crisis, but definitely Asia is much better equipped, much more advanced now, and they are much more resilient” to weather potential financial storms, he said.

In Rhee’s view, Asia is also in a stronger position to handle the monetary policy normalization in the United States, which has raised interest rates four times since the recent financial crisis and has launched the process of shrinking the Federal Reserve’s $4.5-trillion balance sheet this month.

As long as the process is gradual and well-communicated with the support of US economic recovery, Rhee believed, the impact of US monetary policy tightening on Asia “will be manageable”.

The “well-coordinated, well-communicated and gradual normalization” of US monetary policy will actually help many Asian economies to manage potential risks, he said.

 Value of Open Trade

Rhee said, “Global trade has improved” over the past several months compared with the IMF’s assessment in April, as many countries, including the United States, now “understand the importance of open and fair trade.”

The recent recovery of the US (to a certain extent) and European economies has helped boost international trade and has caused a quite virtuous cycle in Asia, which depends heavily on exports, said the official.

Together with increased exports to the US and Europe, consumption, investment and imports are also increasing in Asia, he said. However, there is some concern about how long the growth of Asian exports will continue, as evidence shows that the recent rebound in trade owes to some temporary factors such as the recovery in commodity prices.

Meanwhile, there is uncertainty about trade negotiations and there is some movement toward more protectionist measures in some advanced economies, he warned. “That’s a real risk, but I think the risk is much reduced compared with what we had in April,” Rhee said.

 China Connection

In terms of economic growth and economic progress in China, Rhee said that “Chinese leaders have done a tremendous job” over the past five years. China has made “significant progress” in rebalancing from the export sector to the domestic demand.

He said China alone now accounts for 34% of global growth and has become its largest contributor. But China is still relying too much on the investment growth, he warned, suggesting China could build a social safety net and boost consumption to move towards more balanced domestic demand-led growth.

In its latest World Economic Outlook released earlier this week, the IMF expected the Chinese economy to grow 6.8% in 2017 and 6.5% in 2018, both 0.1 percentage point higher than its previous forecast in July.

Rhee said the upside potential for China’s economic growth stems from higher-than-expected export growth to advanced economies and the so-called supply side reforms. While gains from structural reforms will come with a time lag, it has really a positive impact on China’s economic growth in the medium-term, he said.

In terms of major downside risks, Rhee said it’s a “big task” for China to rein in the rapid credit growth so as to “have a soft landing.”