Major East Asian economies are sound, well balanced and advancing at steady and sustainable growth rates.
The data for the third quarter of this year indicate that those economies are growing in the range of 1.2% and 4.9% set by Japan and China, with Indonesia and South Korea in the upper part of that interval.
Relatively subdued inflation rates – with Japan edging out of price deflation and China’s inflation moderating around 2.3% -- show that those growth rates are entirely sustainable. If needed, the low inflation offers plenty of room for monetary support to aggregate demand.
The fiscal story is a bit different. The ongoing battle with an intractable pandemic is taking a toll on public finances. Still, with the exception of Japan, relatively small public debt liabilities, ranging from 41% of GDP in Indonesia to 69% of GDP in China, could provide additional space for government spending interventions.
External economic positions of these countries also show that their present growth is solidly based and unlikely to be uprooted by cyclical swings in the rest of the world.
East Asia is a net capital exporter
Their current accounts go from a balanced position in Indonesia to a 5% of GDP surplus in South Korea, with China and Japan comfortably fitting in between.
For people remembering the Asian financial crisis of 1997, that is a particularly important aspect of East Asian economies.
At that time, Thailand, a country that precipitated the crisis, was running a current account deficit of 8% of GDP – which meant that it had to import foreign capital (i.e., foreign savings) of the same amount to keep its economy going. But once the foreign investors withdrew their financing, the economy collapsed.
Having learned a very hard lesson, Thailand subsequently set out to consistently run external surpluses. The latest data show the country’s current account surplus of nearly 3% of GDP – an enormous effort at a time when the pandemic has deeply depressed its tourist business.
That example shows why sound external finances cannot be overestimated. They simply mean that domestic savings can finance investments without recourse to foreign capital inflows. Indeed, a country with current account surpluses is a net capital exporter.
That’s what East Asia is now – a far cry from an indebted region ravaged by “hot money” flows. It’s now a close approximation to what the legendary statesman and Singapore’s founder Lee Kuan Yew called in 1972 a part of the world that would become “rich and powerful.”
And, remarkably, with a relatively modest amount of economic integration, East Asia is a part of the world with sharply growing intra-regional trade volumes.
China is East Asia’s principal trade mover
The ten-country Association of Southeast Asian Nations (ASEAN) is the region’s only free-trade area. But the fact that ASEAN’s intra-area trade has remained below 25% (compared with about 70% for the EU) since 2015 means that this is a relatively limited trade block that maintains huge flows of commerce with the outside world.
For example, those ten Asian countries have become China’s largest trade partner. In the first 11 months of this year, the total two-way trade volume reached $789.5 billion, a 30% increase from the year earlier.
That is more than double the U.S.-ASEAN trade of $362.2 billion in 2020. The other important difference is that the U.S. ran a $138.4 billion deficit on its ASEAN trade business, while China made a $78.7 billion net trade income in the January-November period of this year.
Japan’s trade volume with the ASEAN is also growing at double-digit rates, reaching, in the first ten months of this year, a total of $186.3 billion, and exceeding, during the same period, Japan’s total trade with the U.S. by 5%.
China, however, remains the principal mover of intra-Asian trade.
In the first 11 months of this year, China’s bilateral trade volume with Japan rose 19% to $339.8 billion – on course to more than double Japan’s trade with the U.S. by the end of 2021.
Over the same period, the China-South Korea trade is the same story. It’s up 28% to 329.2 billion, with Beijing emerging as Seoul’s by far the largest trade partner, taking a quarter of Korean exports.
The key messages from all this are:
One, East Asia’s economic growth is steady and sustainable. Its low inflation and trade surpluses provide protection from destabilizing cyclical shocks in the rest of the world.
Two, East Asia wants business and means business. It wants no part of big power clashes. ASEAN does not see who can offer an alternative to its sales to China, which rose 32% so far this year to a cool $355.4 billion.
Three, Japan and South Korea are facing the same situation: they see no better and more profitable alternatives to their China trades.