Asian capital markets: Asia’s politicians complain of too much cheap capital from the West. One day, they might be complaining of too little. China alone will need $10.4 trillion of investment a year by 2030, according to Mckinsey. With sophisticated capital markets still lacking, Asia must get ready for life after cheap money.
Export-driven economies have both created and benefited from cheap capital. First Japan, then Taiwan, South Korea and China all grew by taking exporters' foreign currency earnings and recycling them into US government debt. That helped keep US rates low. Americans duly borrowed and spent, or invested, much of it in Asia.
The financial crisis threatened to end that cycle. But it didn't. Governments decided to print yet more money, and with returns in the West at rock bottom, investors have ploughed much of that back into higher-yielding Asian assets.
Now the United States seems on firmer footing, based on recent GDP figures, politicians are starting to grapple with rebalancing. For Western governments, that means tightening belts, and pursuing smaller deficits. For Asia, it means consuming more, exporting proportionately less, and running down high savings. As less flows into US debt, rates should rise.
With the cost of borrowing higher for investors, governments and companies will have to offer higher returns. The trouble is that many Asian economies still have heavy investment to do. Take China, which has an aging population to care for, and much infrastructure still to build. Some poorer nations may have to make do with less.
Capital markets can help fill the gap and channel public savings into innovation and investment, but in Asia they remain underdeveloped. Excluding Japan, the region's bond issuance was just 7 percent of the global total in 2010, according to Thomson Reuters data. Central banks and sovereign funds have liquidity, but because Asia's markets are shallow, the bulk of those funds continue to flow to the United States.
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In the next few years, Asian economies need to address this shortcoming. Some Asian countries will need to liberalise closed markets. Others need to develop fledgling pension funds, insurers and mutual funds.
They may not have very long - especially if the ebb-tide is already underway. As U.S. bond yields and global inflation rise, investors are already demanding higher rates from Asian borrowers. It is time to plan for the day when foreign funds finally grow scarce.