The Current State of Asian Economies: Neither Rising nor in Crisis
Recently, Asian currencies have experienced a significant depreciation, with the Japanese Yen leading the way. This depreciation is mainly due to the strong U.S. dollar and the fact that the Japanese Yen has almost zero interest rates, putting it at a “rate disadvantage.” As a result, the market speculates about another Asian crisis, especially considering China’s current economic troubles.
However, when we analyze the severity of the Asian currency’s depreciation, it becomes clear that the situation is not as dire as some may think. Looking at the performance of eight major Asian currencies against the U.S. dollar, excluding China and Hong Kong, we see that there was a first round of depreciation in Spring 2023 followed by stability until Spring 2024. The recent month has seen a potential new depreciation trend, but it is yet to be confirmed. These depreciations are only a few percentage points and can be considered normal market movements rather than a crisis.
To assess the likelihood of an Asian crisis II, we need to consider the relative economic strengths between the East and West, as this drives capital flow. In the past, Asia’s local demand was dominated by China, but its influence has weakened significantly. Now, Asia’s main driver is export business, and whether Western import demand weakens or production lines are pulled back will determine if a new crisis is likely. However, the pull-back factor is not very apparent as many production lines have been moved from China to other Asian countries rather than back to the West. Additionally, Western demand is not weak, as inflation is much lower than previous peak levels. On the surface, a crisis does not seem likely.
While the evidence of an Asian crisis II is unclear, it is important to note that the outlook is not as strong as projected by optimists like the IMF. The big bust of China could ultimately drag down the region, as the situation there is dire. Another potential threat is the possibility of global inflation, mainly driven by the United States, increasing and requiring further interest rate hikes. This would have a larger impact on the secondary industry (production) than the tertiary sector (services), as production relies heavily on leverage and is more sensitive to rate hikes. Additionally, geopolitical tensions could further increase costs.
Another potential threat is production easing, which would drive capital outflow and currency depreciation. This would lead to a mismatch in currency assets and liabilities, with U.S. dollar liabilities rising and local currency assets falling. However, current indicators suggest that even if all these threats materialize, the extent of the crisis should be lower than what was experienced in the late 1990s.
In conclusion, while Asian currencies have experienced depreciation recently, it is not indicative of a crisis. The likelihood of an Asian crisis II is uncertain, but the relative economic strengths between the East and West, as well as factors like Western import demand and production lines, suggest that a crisis is not imminent. However, it is important to remain cautious as the outlook is not as optimistic as some may believe, with China’s economic troubles and potential threats such as global inflation and production easing posing risks to the region’s stability.
