Will Trump-induced fears cause Asian capital to flow back home?
Ever since US President Donald Trump
unveiled sweeping 'reciprocal' tariffs on nearly all trading partners on April 2, Asia's economies have been at the top of investors' worry list. Concerns initially focused on Asia's acute vulnerability given that it accounts for seven of the 10 economies with the largest trade surpluses with the United States.
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After Trump announced
a 90-day suspension of the levies on April 9, capital flows supplanted trade as the main cause for concern. Investors
betting on steep declines in Asian currencies amid the onslaught of protectionism missed the forest for the trees. Some of the most trade-reliant Asian economies have massive current account surpluses, part of which were recycled into overseas assets, especially US bonds.
Following the 1997-98 Asian financial crisis, policymakers across the region decided that accumulating
large foreign currency reserves was a crucial prerequisite for financial stability. By 2007, the aggregate current account surplus of Asia's surplus economies – mainland China, Taiwan, Hong Kong, Japan, South Korea and Singapore – had reached almost US$700 billion, up from nearly US$200 billion in 2000.
In 2005, then US Federal Reserve chair Ben Bernanke noted that Asian economies were saving more than they invested at home and had become a net supplier of capital to the rest of the world. The region's 'savings glut',
as Bernanke called it , was helping finance America's current account deficit. The former Fed chair questioned whether the imbalance between the US, which accounted for the bulk of global net capital imports, and Asia, which dominated global net lending, was sustainable.
By the end of last year, Asian investors – both official sovereign investors, such as central banks, and private ones, like insurance companies – accounted for 45 per cent of
foreign holdings of US Treasury bonds . They also accounted for 55 per cent of foreign holdings of debt issued by a US government department or government-sponsored enterprise and nearly 20 per cent of foreign holdings of US stocks, according to data from Societe Generale.
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Yet
Trump's return to the White House has cast doubt over the status of the US as a safe haven. In addition to the ruinous trade policies, Trump's reckless
tax cuts and spending legislation – projected to add at least US$3 trillion to America's already ballooning public debt in the next decade – is putting US assets under strain and endangering the country's creditworthiness.
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