No, East Asians are pursuing a process of an ever expanding intra-regional free trade, but, wisely, they would not even think of common currency areas. And neither would they contemplate economic ostracism and exclusion against their wayward fellow Asians. Speaking of Myanmar a few years ago, the secretary general of the Association of South-East Asian Nations (ASEAN) was saying: "We don't do sanctions."
Excess savings to support growth
Indeed, they are seeking harmony and inclusion. That serves them well because the increasing integration, sound fundamentals and strengthening intra-regional flows of commerce and finance will allow East Asian countries plenty of room to support demand, output and employment regardless of what happens to European and North American economies.
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The proof of that is that this region continued to be the fastest growing part of the world economy, despite recessions and subpar growth in Europe and in the United States. At the moment, East Asia (excluding China and Japan) is a net capital exporter to the tune of $245 billion – a huge amount of excess savings that can be readily deployed to finance investment and current consumption throughout that area.
Direct and portfolio investors might wish to think of this at the time when the world is spellbound by the prospect of rising dollar interest rates and the coming avalanche of euro liquidity.
Now, bring in China and Japan to see how these two economies are enhancing the growth potential of the rest of East Asia.
Look at China first. Beijing can easily sustain a sound and balanced economic growth somewhere in the range of 7-8 percent. Those who doubt that rising household consumption (which already accounts for 51 percent of the economy) can offset a widely expected decline of export sales need only think of 200 million people who will be moving from rural areas to urban communities over the next five years. Think of the boost to aggregate demand that will come from housing investments and spending on consumer durable goods, healthcare and education.
And that will still leave more than 400 million people precariously living in China's countryside. Most of that population is potentially part of the government's vast urbanization project, requiring gigantic investments in modern infrastructure and social welfare services.
With a savings rate of 50 percent of the gross domestic project (GDP), China has the means to finance this fundamental transformation of its economy and society, which virtually guarantees the country's strongly rising domestic demand over the coming years.
China and Japan as regional growth factors
That, of course, also means that China will remain a rapidly developing export market to its Asian neighbors. There is already an enormous progress in that direction because China's trade and investments with the rest of Asia are its main policy priority.
The Chinese government is reporting that the country's trade volume with East Asia last year reached nearly $1.4 trillion. According to the same source, that was more than China's volume of trade with Europe and the U.S. taken together, with Asian countries now representing half of China's top ten trade partners.
Similar trends are seen with respect to direct investment flows. The most recent data show that 70 percent of China's $102.9 billion in outbound foreign direct investments went to the rest of Asia.
Japan – with its highly sophisticated and diversified technologies -- is an equally good source of support for the development and modernization of East Asian economies.
In the case of China, Japan's broad range of consumer and industrial goods can easily beat any other potential competitors on Chinese markets. I, therefore, believe that Japan's 13.4 trillion yen worth of exports to China last year – an increase of 6 percent from 2013 – is most probably well below the actual possibilities, provided the two countries can improve their strained political relations.
The rest of Asia also looms large in Japan's trade. Last year, Japan's purchases from its Asian neighbors increased 7.3 percent from the previous year and accounted for 45 percent of its total merchandise imports. That helped to cut in half Japan's trade surplus with Asia, compared with 2013, and served as a net contribution to regional growth. The Philippines and Vietnam were the largest beneficiaries of the Japanese import demand.
Japan's contribution to East Asian economic growth is bound to increase in the years ahead. That region already takes 29 percent of Japanese foreign direct investments, second only to the United States.
East Asia's large growth potential and vast development needs can be readily financed by the area's enormous excess savings. That regional pool of investment and consumption funding will provide an effective protection from possibly adverse swings of dollar- and euro-denominated capital flows.
The regional focus of incoming financing institutions, such as the Asian Infrastructure Investment Bank (AIIB), will also support and speed up the modernization of this fastest-growing segment of the world economy.
Most of the East Asian stock markets have done well over the last twelve months. They will remain outstanding growth plays.
But there is no need for anecdotal evidence. China has already moved to support Asian growth through two major financial initiatives: The New Development Bank and the Asian Infrastructure Investment Bank.