SINGAPORE // As senior political analyst at Lehman Brothers in London, Alastair Newton wrote a regular report for clients on global trends called Things Which Keep Me Awake at Night. Now Lehman has filed for bankruptcy protection, its employees have cleaned out their desks and Mr Newton is negotiating a new contract at Japanese brokerage Nomura Holdings, which last week paid US$225 million (Dh826m) for the company's operations in Asia, Europe and the Middle East. Fittingly, his latest report reflects how his own industry has become the subject of his sagacious insomnia. Delivered in his role as an independent analyst to the Japan Society in London, it was entitled Go East, Young Man.
"The global centre of economic gravity is shifting closer to Asia than at any time since the early 18th century," Mr Newton said. "As Nomura's rescue of a sizeable part of Lehman underlines, the power of ultimate ownership in the world of finance may now be moving rapidly and irrevocably eastwards." Commentators have been proclaiming the dawn of an "Asian century" for years. But the unfolding financial crisis emanating from Wall Street is prompting an increasing number of experts to conclude that the Anglo-American model of free-market capitalism is collapsing and that for new growth and investment the global economy will henceforth have to look to the more state-guided, cash-rich economies of the Gulf, India, China and Japan.
Japan's inclusion in this new axis of economic power reflects a subtle, but important, shift in thinking about the future of the global economy. Until a few months ago, many economists in Asia and other emerging markets subscribed to a hopeful theory that emerging economies such as China and India had developed sufficient trade between them to break away from the powerful economic tides of the US, the world's largest economy.
While emerging economies are expected to keep growing, few now dispute that the crisis in the US is going to take a significant global toll. Instead, the implosion of global credit in the past two weeks has shifted the focus from countries that will still manage to grow to countries that - in a credit-starved world - will have the money to finance that growth. "If you start from the assumption that we'll lack a lot of money to fund infrastructure projects and major investments, we have to look at where the money is," said Thomas Enders, the chief executive of Airbus, during last week's meeting of the World Economic Forum in Tianjin, China.
There is significant scepticism, however, as to whether either China or Japan is ready or willing to step into these larger shoes. China is already acknowledging the bigger role being thrust on it in terms of growth. "The biggest contribution we can make to the world economy under the current circumstances," the Chinese premier Wen Jiabao told the forum in Tianjin, "is to maintain China's strong, stable and relatively fast growth, and avoid big fluctuations."
China's economy remains one bright spot in a slowing world. China's economy is projected to expand by 10 per cent this year as global growth slows to just four per cent. After trying to cool what was deemed an overheating economy, China is now trying to offset slowing export demand by cutting rates and boosting government spending. Last month, the People's Bank of China cut its benchmark interest rate for the first time in six years and reduced reserve requirements for smaller banks.
"They're worried that some of the measures they put in place in the last several years could be having too much impact," said Thio Chin Loo, a currency strategist at BNP Paribas in Singapore. "They've lifted their foot off the brakes." Caught between slowing exports and what economists say is a bubble in domestic investment, China's only option is to boost growth made by personal consumption. According to the China Association for Soft Science Studies, domestic consumption now contributes more to China's economic growth than exports, but only by a slender margin.
The problem, economists say, is that Chinese consumers are still adjusting to life in an economy where job security is no longer guaranteed. China's reforms over the past 30 years have sped economic growth but did away with the "iron rice bowl" of lifetime employment, education, housing and health care once provided by state-owned enterprises. "The savings rate is still very high because the safety net is very low," said Friedrich Wu, a professor at the Institute of Defence and Strategic Studies at Singapore's Nanyang Technological University. "So people have to save a lot."
The Chinese save roughly half of what they earn, which if it is not invested inside China, has to be invested abroad. China is consequently one of the biggest buyers of US government debt, a fact that has helped keep US interest rates low despite its ballooning current account deficit and is symptomatic of what US critics have called China's "savings glut". Economists say China, Japan and the Gulf are likely to continue to finance the US deficit. Aside from worrying about the health of one of their biggest customers, there are few other markets large enough to allow them to park their massive export earnings and easily get them out again.
But China is also looking increasingly to invest in faster-growing emerging markets, particularly those where it can secure supplies of natural resources - the Middle East, central Asia and Africa. "In terms of a capital exporter, China is certainly playing a more important role, especially in emerging economies," said Prof Wu. China's overseas investment grew 83 per cent between 2005 and last year, to $22.5 billion. Economists say it is helping to shield poorer economies in Africa and Latin America from the worst effects of the credit crunch.
China's growing foreign investment is nothing next to Japan's, however. Investment from Japanese corporations fuelled South East Asia's supercharged growth in the late 1980s and early 1990s, then swivelled to China. After peaking in 1999, Japanese FDI slumped for the next five years. But in 2005, it began rising again, and according to a recent report by the UN Conference on Trade and Development, rose 60 per cent between 2005 and last year to $73.5bn.
Japan sparked a case of 1980s nostalgia last week when, fresh on the heels of Nomura's announcement, its largest bank, Mitsubishi UFJ Financial Group, agreed to pay $9bn for a 21 per cent slice of Morgan Stanley. Three days later it announced that for dessert it would pay $200m for 9.9 per cent of Aberdeen Asset Management of the UK. Japan's outlays reminded the world that, despite 16 years of moribund economic growth, the country is sitting on trillions of dollars in savings that need to be invested to help finance the retirement needs of its ageing population. Japan's $954bn in foreign currency reserves rank second only to China's. Its $936bn government pension fund makes it technically the largest sovereign wealth fund. Banks such as Mitsubishi UFJ, moreover, have slowly rebuilt their balance sheets and Japanese companies remain largely unscathed by the credit crisis. More than 40 per cent of public Japanese companies were reportedly debt-free in their latest fiscal year.
Japanese individuals had also begun venturing abroad as well to beat bank deposits that earn just 0.3 per cent. "Japanese investors are dying for better returns on their money," said Ms Thio. Thousands of Japanese housewives were even dabbling in foreign currency trading, with many borrowing money at low Japanese rates to earn higher returns abroad. Before the credit crisis struck last August, Japanese individuals engaging in this so-called "carry trade" reportedly accounted for more than $9bn in daily trades - one fifth of the global foreign exchange trading taking place during Tokyo's trading hours.
After losing millions in the credit crisis, Japanese investors have regained their customary conservatism, analysts say. But once markets settle, some predict, Japanese savers will likely put their savings to work overseas again. "When things stabilise," said Ms Thio, "I think the appetite for risk could slowly come back." warnold@thenational.ae