Two-millennia old terracotta sculptures – part of the funerary treasure trove of China’s first emperor – attract several thousands of tourists to visit Xi’an each year.
But what is less well-known is that the city is also where globalisation originated, starting with the Silk Road, along which goods were ferried from Xi’an all the way to Rome and back again.
In an echo of history, Asia now seems to be the epicentre of globalisation even as the West has moved away.
Drivers of integration
Sceptics of globalisation see the movement as being on its last legs due to the rise of populism across the world, especially in America – once a key cheerleader for free trade. The coronavirus pandemic this year has lent additional fuel to these sceptics, as policymakers around the world appear to be pursuing an “every country for itself” stance.
But President Trump’s “America First” approach has actually led Asia to embrace globalisation, at least locally. Hard on the heels of Washington’s withdrawal from the Trans-Pacific Partnership (TPP), the other signatories decided to proceed with the agreement anyway.
The revised deal was named the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and was signed in March 2018. The “comprehensive” in the name is significant, given that the treaty excludes the US, the world’s largest economy today.
The RCEP could become even more comprehensive if it includes India, Asia’s third-largest economy, which was earlier involved in discussions but opted out in November 2019. However, there is speculation that the coronavirus may prompt India to overlook its objections to the deal.
There are other ways in which the pandemic may increase trade integration within the region, which may lead companies in Asia to favour sourcing materials closer to home. Even before the coronavirus hit, there had been a trend towards localisation as companies sought to deliver products faster to end-consumers.
This drive is now only likely to increase, with the disruption highlighting the vulnerabilities of long and complex supply chains.
An Asian union?
It is unlikely that Asian economies can unify in the same way that the EU did. Neither the RCEP nor the CTTP cover as much ground as the EU. Also, like in Europe, there are stark economic divisions between Asian countries. At one end of the spectrum is Singapore, with a stable government and a GDP per capita almost the same as that of the US.
Almost all Singaporeans have access to bank accounts. By contrast, in countries like Cambodia and Myanmar, the political framework is less robust, urbanisation is relatively low, and a significant proportion of the population lack access to a bank account.
Such differences often make for unequal partnerships, as is the case in Europe, and can lead to discontent if the benefits are perceived to be largely in favour of a few countries.
And there are greater political disagreements in Asia than in Europe. In the past year, for example, we have seen a feud between South Korea and Japan that is more pronounced than any existing disputes between European nations.
Meanwhile, Japan has a large investible pool of assets but a domestic market offering very low returns, or even negative interest rates, when it comes to sovereign bonds.
Consequently, the government pension fund has been increasing its share of investment in foreign assets – and the developing countries in the region countries stand to benefit owing to the relatively higher returns that they offer.
Long-term growth drivers
Aside from the benefits of increased trade, there are several other catalysts for economic growth in Asia. The region is projected to account for more than half the world’s GDP (based on purchasing power parity) by 2040.
The majority of the growth is expected to come from China and India, followed by the ASEAN set of countries. Most countries in Asia have favourable demographics, relative to Europe.
Steps to reduce poverty are already underway. For instance, in Cambodia, the percentage of citizens living below the poverty line more than halved over the seven years to 2014.
It is true that the coronavirus risks undoing all these gains but it has also inspired countries to step up their fight against poverty. For instance, Pakistan has launched a mobile-based cash-transfer scheme.
Policymakers are also recognising the crucial need for infrastructure development and urbanization. Over each of the next 10 years, five million people in ASEAN alone are expected to migrate into cities.
Increased foreign investment should accelerate this process, by helping to raise the necessary funds.
As well as increasing growth, rising urban populations and improvements in infrastructure should help raise incomes and result in more people achieving middle class status.
Higher incomes as well as growth should increase the region’s already strong savings rates. Indeed, over the next five years, Asia’s share of global personal financial assets is expected to account for 75% by 2025.
The problem is that much of these savings are generally in cash or bank deposits, owing to the relatively weak penetration of the financial sector.
The growing savings pool
Savings in Asia typically occur outside the financial system, with both individuals and firms favouring informal sources of finance. This is especially true of the less developed countries in the region; for example, about 40% of Cambodia’s population do not have bank accounts:
Barriers to financial inclusion include the lack of urbanisation and infrastructure as many people live in remote areas where physical access to a bank is a challenge. This particular hurdle is being overcome by the rapid growth of fintech, owing to the region’s high rates of mobile-phone penetration and internet usage.
Asia is already home to 50% of the world’s internet users, and digitisation is set to increase, not least because the CTTCP involves the elimination of duties on large swathes of the technology and communications sector.
Additionally, countries are focused on expanding the coverage of financial services. India, for example, has substantially reduced the unbanked proportion of the population with its digital biometric identification scheme.
Meanwhile, in Malaysia, the government’s initiatives to promote digital access to financial services and the launch of branches outside urban centres have significantly improved financial inclusion.
Liberalisation can further enhance financial penetration. Policymakers across the region are recognising importance of this, with China recently outlining plans to allow overseas investment-management firms to enter the domestic market.
These factors can lead to more funds being channelled through financial intermediaries and thus to the development of financial products, which can foster a virtuous cycle of growth and savings (see diagram).
To sum up, while Asia faces many near-term challenges, not least from the pandemic, the future seems bright given the likelihood of increased regional trade integration and growing financial inclusion.
Of course, the onus is on policymakers to tackle issues relating to infrastructure, urbanisation, poverty alleviation and inequality. But if these can be overcome, then the ancient silk route can help capital move east and become the new heart of globalisation.
For more information about how Copylab can help the financial industry to communicate its messages clearly and with confidence, please contact Simon Lints, our Strategic Director, Asia & the Middle East.
Nandini is an investment writer in our London office. She has an MSc in financial economics from Saïd Business School, Oxford University and an undergraduate degree in economics from Aston University. She also holds the Investment Management Certification. More articles from Nandini Rao