Putting Asia’s Savings to Work in Asia

HONG KONG – For more than three decades, Asia has experienced faster economic growth than any other region. As it has developed, Asia has been exporting its savings, through a trade surplus with the United States, and re-importing them, in the form of direct and portfolio investment via New York and London – a process that has created severe, though largely overlooked, financial tensions.

At the end of 2015, the combined net asset position of China, Hong Kong, Japan, Korea, Singapore, and Taiwan amounted to $7.3 trillion – almost exactly equivalent to the net international investment liability of the US. And this imbalance is not likely to go away any time soon. In fact, the US’s net liabilities have grown lately – to $7.8 trillion at the end of September 2016 – owing largely to its continuing current-account deficit and stronger exchange-rate effects.

Why don’t Asian countries invest their savings within their own region? An obvious reason is that the US dominates global finance, particularly in the capital and currency markets. In a 2005 paper, Pierre-Olivier Gourinchas and Hélène Rey argued that the US, once the world’s banker, had become its venture capitalist, investing internationally, especially in Asia, instead of just borrowing and lending.

But that doesn’t mean that Asian countries are better off investing in the West – not least because of the carry trade that took root after the 2008 financial crisis. As Hyun Shin and other economists at the Bank for International Settlements have argued, low developed-country interest rates and a weak dollar drove financial markets, led by the New York and London hubs, to borrow money in low-interest-rate currencies and invest in higher-interest-rate currencies.