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Ten trends that will shape Asia in 2014: Carnegie

Map of eastern hemisphere highlighting Asia
Adam Gault | OJO Images | Getty Images
Map of eastern hemisphere highlighting Asia

Global think tank Carnegie Endowment for International Peace expects 2014 to be a volatile year for Asian investors due to rising political risk, security tensions and skepticism over the commitment to economic reform in China, Japan, India and Indonesia. Thus, it expects these ten trends to shape the landscape for investors this year.

1. Asia drives demand

For decades G7 countries have been buying Asian exports and investing heavily in Asian economies, but Asia's role has transformed; the region has become a major factor in advanced economies' own growth stories, with Asia now investing in and consuming more from overseas. A key example is Asia's relationship with the U.S.; American demand for Asian goods has powered Asia's export-led economies since the 1960s, but now Asia has become an important export destination for various U.S. goods including corn, soybeans, pork and natural gas.

(Read More: This Asian market laggard could shine in 2014)

2. Security fragmentation threatens economic integration

The primary challenge for Asia will be the conflict between economics and security, said Carnegie. The major powers in Asia are mistrustful and prone to nationalism, as has been evident with the territorial disputes between China and Japan in recent years. The think tank expects this conflict to sharpen in 2014, and is particularly concerned about China.

"Bluntly put, Beijing's long-term strategic intentions inspire deep anxieties," read the report.

3. The contested commons

Regional tensions will not be limited to territorial disputes but will translate to the global commons as well. China announced its air defense identification zone in November and similar declarations are likely in 2014, said Carnegie, leading to disputes over rights of passage, freedom of navigation and diverging interpretations of customary international law.

(Read More: Four big challenges for Asia in 2014: HSBC)

4. Japan's pivot to Asia

As strategic wariness between Tokyo and Beijing intensifies, Japanese Prime Minister Shinzo Abe is expected to continue to strengthen Japan's pan-Asia diplomacy, through leveraging project finance, trade, aid, people to people exchanges and security cooperation. Investments may begin to flow out of China to other Asian destinations if tensions escalate in 2014. According to Carnegie, one challenge will be for Tokyo and Washington to stay coordinated

5. North Korea's great unraveling

The execution of Jang Song-thaek, the uncle of North Korean leader Kim Jong-un, highlighted internal divisions and questions over the stability of the regime. Carnegie expects instability risk to rise in 2014. If Pyongyang continues to use provocative measures, especially in the form of conventional attacks around or beyond its disputed maritime border with South Korea, these could be destabilizing as they would question the conventional deterrence that has kept the peace for the past six decades.

6. The future of the U.S. rebalance

Washington will face choices in 2014 that will test traditional U.S. roles in Asia in new ways. While the U.S. has long been the provider of security related and economic-related public goods in Asia, Washington's allies will be watching how it manages the impact of sequestration on its defense posture and whether it makes long-range investments in new capabilities.

(Read More: Five things that could go wrong in 2014)

7. A convergence of models

This year will see continued competition between regional trade agreements, such as the U.S.-backed Trans-Pacific Partnership (TPP) and the pan-Asian Regional Comprehensive Economic Partnership (RCEP). Previously, China looked at the TPP warily, viewing it as part of a U.S. containment strategy, but it could start to take more interest this year, said Carnegie. However, the think tank reiterated that many conflicts between the TPP requirements and China's domestic arrangements still exist.

"But if the TPP is concluded in 2014, it will set a new competitive standard in Asia," said Carnegie.

8. China's economy: to market?

China ended 2013 having adopted a sweeping economic reform agenda at the Third Plenum in November but Carnegie pointed out that these reforms will not succeed unless the state sheds some of the functions that make it a pervasive force in the economy. However, despite the challenges, Carnegie expects the biggest change to come in this area of reform, with significant moves toward market-based prices and steps to liberalize deposit interest rates.

"The biggest struggles, meanwhile, will be over restrictions on internal migration and the subsidies provided to state-owned firms."

(Read More: China debt: The biggest 'known, unknown' in 2014?)

9. The push and pull over reforms

Carnegie expects antsy global investors and angry domestic voters to pull and push a number of Asian governments in competing directions. The body expects there to be little progress on Indian reforms as the pending election is unlikely to lead to bolder initiatives. However there will be increased pressure on India's states to enhance their role as local laborites for growth-conducive reforms. Among other examples, Carnegie said Japan will have to confront skepticism on the prime minister's economic agenda, while ongoing political conflict will test investor confidence in Thailand.

10. Central Asia in flux

Finally, Carnegie sees fresh economic and strategic pressures emerging in continental Asia in 2014. Landlocked Central Asian economies will be tested amid the U.S. withdrawal from Afghanistan, new Chinese investment and infrastructure initiatives, Russia's efforts to extend its preferential customs union, and Iran's uncertain trajectory.

(Read More: Pimco's three big worries for Asia in 2014)

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie