Things coming back in Asia

After many decades of playing the role of 'Big Brother' or 'Uncle Sam', now the West is in crisis – economically! They also have other problems such as social degradation and of course extreme dependence on import. And such tendencies have opened great window of prospect for a number of Asian nations in selling goods and services worth billions and trillions of dollars, thus finally putting United States and a number of European nations into the debt bomb they are sweating to handle now. According to economists, American debt crisis will not end with in near future, rather it will continue in the decades to come. While Americans and Europeans are struggling with their economy and debt crisis, Chinese economy in particular, along with economy in a number of Asian nations including Japan, South Korea, India, Vietnam, Thailand, and Taiwan are continuing to boom. Beijing is set to emerge as the number one economic power in the world leaving Japan at second position. China's investment will keep growing at a healthy clip in months ahead. It showed that China pulled in $69.2 billion of foreign investment direct in the first seven months of this year, which is 19 percent above a year ago, and putting the country on track for another year of record foreign direct investment. Mostly importantly, since United States emerged as world's biggest economy, for the first time, had to witness downgrading of its credit ratings, which surely are real red signal for Americans as a whole. We may not yet say American economy has doomed, but evidently it is sinking.

China, the largest foreign holder of US Treasuries, continued to increase its purchases in June as its holdings rose by $5.7 billion to $1.17 trillion, according to new data from the US Department of the Treasury. China boosted its holdings for the third straight month although global demand for US stocks, bonds and other financial assets weakened in June from a month earlier as the US Congress remained deadlocked over the debt ceiling, which were not settled until Aug 2, 2011.

Latest information from the US Treasury data showed that foreign residents decreased their holdings of long-term US securities in June - net sales were $11.5 billion. Net sales by private foreign investors were $23.0 billion, and net purchases by foreign official institutions were $11.5 billion.

Japan, the second-largest holder, reduced its holdings in June by $1.4 billion to $911 billion. Hong Kong, counted separately from China, reduced its holdings by $3.5 billion to $118.4 billion in June.

This report also reflected the concern over the debt limit crisis which affected many investors' confidence in the US economy. Shortly after Washington reached a last-minute deal on raising the debt ceiling earlier this month, rating agency Standard & Poor's downgraded the US credit rating to "AA+". Other rating agencies such as Moody's kept the US' AAA credit rating but put a "negative outlook" on it for review, which indicates that the rating could be knocked down within six months to a year's time.

Commenting on China-Japan's buying US Treasury Bonds, an analyst said "Asians are buying US Treasuries to stem gains in their currencies against the dollar. They need a strong dollar versus their currency to keep Americans buying their exports. This will not change, at least not on China's part, until that country's economy is supported by internal consumption rather than relying on export."

He said: "America's real problem isn't foreign held debt, although the US does owe almost a third of overall debt to foreign states. China and Japan, who are United State's third and fifth creditor together hold 14.4 percent of US debt – American's debt to themselves, approaching ten trillion dollars, is over eight times the amount owed China."

According to Bureau of Economic Analysis, the largest problem in America is the massive debt bomb called the Social Security Trust Fund and the US$ 2.67 trillion the US government owes it. America's population is aging; 78 million baby boomers are retiring over the next 15 years meaning massive increases in the federal transfer payments. This is not simply a matter of today's US$ 2.67 trillion, as serious as the number is, its dwarfed by the hundreds of trillions of dollars America is committed to spending on social benefits over the coming decades.

Meanwhile, China continues to fund its own foreign program, often in ways that directly contradict U.S. interests. As Secretary of State Hillary Clinton recently put it, the U.S. and China "are in a direct competition for influence."

According to a bipartisan group of senators that wants to end aid to China, the U.S. sent about $65 million to China in 2009, the last year for which complete figures are available, and a total of $275 million between 2001 and 2009. Some of that money works at cross purposes to U.S. policy. For example, some of the money has gone to developing broadband Internet service in rural areas - service that the Chinese government censors for its own purposes. And, while failing to fully fund vital public transit at home, the government sends money to China to help it expand its commuter railroads. The bipartisan group of senators, including Sen. Bob Casey of Scranton, chairman of the Joint Economic Committee, called on foreign aid appropriators to end aid to China. He said foreign aid is important and should be maintained. But it should be directed where it is most needed and where it can best serve U.S. interests. "China, the world's second-largest economy, is not that place. Aid to China should be redirected."

It is unimportant at this stage to discuss about possible US aid to China in future, as the country's self economy is in deepest crisis now. The economic uncertainties facing the US, particularly in the aftermath of the downgrade of its credit rating, have brought back fears of a downturn in the global economy. While no one doubts the difficult times ahead, few would like to hazard a guess on the extent of adjustment costs that this most recent crisis emanating from the world's largest economy would bring. However, even if the precise dimensions of the problems cannot be anticipated, there are tell-tale signs that unless the US economy undergoes a structural change, its troubles and, therefore, those of the global economy, are not going to disappear in a hurry. In short, the time for quick fixes is passé.

It would seem that for the US "bad news comes in threes". Alongside the news about the downgrade came the strongest evidence that the US has indeed gone into what John Maynard Keynes called the "liquidity trap". This is a situation where monetary policy does not work, in other words, the rates of interest are so low that potential investors prefer to hold on to cash in the absence of a viable option. Recently the Bank of New York Mellon provided the evidence of the "liquidity trap" in the US economy through its decision to charge corporate depositors a fee for putting money on deposit instead of paying them interest.

What are the possible ways out of this impasse? The most widely professed view is that the solution lies in the classical Keynesian prescription of the government to borrow. This solution is not available to the US administration now that Congress has linked the raising of the debt limit to a cut in federal spending. The administration seems no longer in a position to spend its way out of a squeeze.

But it is the downgrading of its credit rating, the first time this has happened since the US emerged as the world's biggest economy, which could considerably affect its standing in the world. While Standard and Poor's [S&P] has faced the flak for the downgrade, the more significant development was the move a few days prior to the S&P announcement by the Chinese credit rating agency Dagong to downgrade the local and foreign currency credit rating of the US from A+ to A with a negative outlook. For a number of weeks, expectations were rife that the US' credit rating would be lowered, but quite clearly none of the leading rating agencies had dared to do so until Dagong pulled the plug. Whether the Dagong-S&P moves set off herd behavior among the rating agencies would be seen with interest.

While the precise ramifications of this downgrade - coming particularly from a credit agency from the US' largest creditor country - may be felt in the weeks and months ahead, there are indications that the Chinese are signaling diversification of their assets away from dollar holdings. Currently, China holds around $1.5 trillion in US treasury bonds, but advisers to the Chinese government have already started commenting that the dollar holdings may hurt the country in the medium term. Suggestions are also being made to limit the holding of treasury bonds to $1 trillion.

Most of these suggestions are unlikely to be implemented in the immediate future for two reasons: One, China can ill-afford risking a huge depreciation in value of these assets that would result from a sudden loss in confidence in the dollar, and two, it has rather limited options to park its US$ 3 trillion plus reserves. The US treasury bonds remain the largest and most liquid investment product in the world despite the recent upheaval. Further, China can do little to limit its dollar holdings as long as it maintains the extraordinary trade surplus that it has enjoyed with the US. The size of the US market is such that even the best efforts the Chinese may make towards diversifying their exports are likely to pay dividends only over the medium term. It must be mentioned here that China has been taking several steps to deepen its trade relations with some of the major emerging economies by promoting the use of bilateral swaps and even promoting the use of Yuan. These moves will not only help China to reduce its dollar overhang, it will also pose a serious challenge to the dollar as the primordial international currency.

Another development worth noting is that China has upped the rhetoric through its severe comments on the economic governance of the US. For instance, the downgrading of the credit rating was ascribed to the defects in the US' political structure that were exposed during the bipartisan struggle in Congress, as a result of which the US government faced great difficulty in defusing the sovereign debt crisis. In the view of the Chinese authorities, the interest and safety of the US creditors lack guarantees needed from political and economic risks. While the global economy will adjust to the emerging reality of the growing weakness of the US economy, the shift in the economic power balance, which is an inevitable consequence of the events unfolded in the past few weeks, will be watched with interest.

Asia turning dominant force:

It is possibly now even unarguable fact that Asia has already been able to acquire both economic and military strength as well as nuclear power, which would surely be superior to United States or the Europeans, if only Asian nations can come under same umbrella of mutual cooperation. America and Europe are aware of it and surely due to this particular reason, US-European nexus will desperately attempt in numerous ways to play the old-styled "Divide and rule" trick on Asian continent.

Amongst Asian nations, China, India, Pakistan, Iran and DPR Korea [North Korea] are already nuclear powers. It is hinted that in next 8-10 years, a few more nuclear nation may emerge inside Asian continent.

Militarily, a number of Asian nations such as China, Israel, India and DPR Korea are clearly having a strong army. On the other hand, Asian military is gradually depending on mostly Asian technology and military hardware instead of looking towards the West. This tendency can be named as 'Asian Dependency', which not only is helping armies in Asian continent to acquire power without dependence on America or the West but also is helping keeping the money very much within Asia instead of flushing it out to other continents.

Economically China, Japan, South Korea, India, Vietnam, Taiwan, Singapore, Malaysia, Indonesia, the Middle East are already continuing tremendous progress on a steady growth. Meanwhile China, Japan, South Korea and India have already emerged as top players in global economy. With the economic recession in the West as well as 'Debt Bomb' fear, once the Asian economic giants like China, Japan, Korea and India will start investing in other least developed or developing Asian nations with the ultimate goal of creating market for its products, in case American and European market gradually decline, in next 10 years, significant economic boom will be witnessed in those Asian nations, thus actually turning Asia into the Economic super-power in the world. Moreover, with militarily and in nuclear technology, Asian nations would stand as much stronger than American and European forces in the span of 3-4 years.

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Things coming back in Asia

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