The last decade witnessed considerable structural change in the global economy. What influence will Asia’s ever-more globalized economies exert in the coming years?
Hindsight is a unique asset. Analysts pondering the last decade inevitably highlight the deep, structural impact of the 2008 global financial crisis, particularly on the economies of North America and Europe. Simultaneously, waves of declining demand were felt in Asia’s supply-led economies, while capital investment remained aggressive across the region’s emerging markets.
Stretching the mind further back recalls the slew of foreign investment into China and the pre-global financial crisis turnaround of China’s major banks in the early 2000s, and the growth of intra-regional trade and cooperation among Asian nations. Longer memory recall reminds us that these defining events occurred as Asian economies and currencies recovered from the economic turmoil of the 1997 Asian financial crisis.
Today, as we seek to apply the lessons of the past, a readjusting world is dominated by the phrases “balanced growth” and “stable outlook.” Relative to last year, the outlook for advanced economies is improving, but Asia’s headline growth rates have slowed, oil and commodity prices have softened and financial markets are volatile. At the same time, new flows of investment are heading from east to west, and the infrastructure build-out underway across Asia is designed to support sustained regional growth and greater competitiveness in a global context.
To cast a light on Asia’s growing economic influence, we asked four business leaders for their views on the key developments affecting the world both today and in the future.
Juerg Zeltner is President of UBS Wealth Management, Swiss bank UBS’ division offering high-net-worth individuals around the world with a range of advisory and investment products and services.
Is the rising influence of Asia reshaping the structure of the global economy?
That reshaping has already happened in the minds of investors. When I speak to clients about growth markets and where they want to invest, we’re talking about Asia, and especially China, because that’s where the strongest wealth growth is. For example, a recent study UBS did with PwC showed that in the first three months of this year, we saw almost one billionaire a week being created in China. And by 2025, billionaire wealth in Asia is expected to surpass that in the US. The rate of wealth growth is astonishing and unprecedented. But it’s not just the wealthiest in Asia who have been making an impact – overall Chinese [consumer] demand boosted commodity prices in 2006 and the country’s stimulus in 2009 meant the Chinese economy powered global growth. The Chinese consumer is now the most important in the world and China will soon be the largest consumer market in the world, this affects every decision we make.
What is the likely impact of Asian currencies on global financial markets?
At the moment, global financial markets are still centered in the US and Europe, but as wealth continues to shift and Asian markets grow, I expect that their currencies will grow with them. We have already seen steps taken by China as they’ve worked to create a bond market and loosen controls on the RMB, but a lot of their equities are onshore and not accessible to foreign investors. Remember, China still has capital controls in place, so it will take time before it becomes an active part of global transactions or global reserves, particularly compared to the dollar and euro.
Global investment from China appears to be rising fast, is this a trend to watch?
China’s economy is expected to double from USD 10 trillion today to USD 20 trillion by 2025 and investment flows out of China are going to keep growing. In 2015, for the first time, China will generate more outbound investment than it receives in inbound investment – and that will have an important impact, especially in Asia and Africa. For example, we are seeing an increase in Chinese tourism – the number of Chinese households that can afford a holiday abroad will double in the next decade to 220 million. The perception of China has long been that it is the world’s factory, but China is now a genuine driver of global demand rather than just a point on a production chain. That is having an important psychological impact in Asia and reverberating around the world.
The 2014 UBS Annual Report noted that digitization is driving change in the investment and wealth management sector. How radical will this change be?
The single biggest challenge facing the financial services industry is the impact of technology. There are three megatrends that we think will fundamentally reshape our industry and the way we serve our clients in the future: the shift to mobile and multi-channels, driven by an increased desire for convenience and accessibility; the use of big data to make better decisions about wealth preservation and creation; and the impact of social media, which is changing how people gather information and interact, not least with companies. We spend hundreds of millions of dollars every year investing in new technology to meet clients’ complex and quickly evolving digital needs and anyone in the industry who isn’t doing the same will fall behind.
At the time of writing and printing, Katherine Garrett-Cox was CEO of Alliance Trust, a UK investment and savings business with an over 126 year history of building investor wealth. Katherine was also a Co-Chair of the World Economic Forum Annual Meeting 2015 and winner of the 2015 Veuve Clicquot Business Woman award.
Is the rising impact of Asia reshaping the structure of the global economy?
It’s clear that since the financial crisis in 2008, the leading economies in Asia have exerted a greater influence on the global economy. This influence is evident in many sectors, and we think very carefully about the way companies we invest in are doing business in Asia. Commodities is a good example, it’s unlikely the world would have seen such a huge swing in commodity prices in the last two years had it not been for China’s influence. China is by far Asia’s largest economy, and we are tracking the ongoing transition from an export and infrastructure-led economy to a consumer-led economy. In some sense, China is now seen as a developed economy, and the value chain is cascading to countries like Vietnam, Bangladesh and Cambodia. The period of remarkable economic expansion in China has brought with it some issues that give us, as investors, concerns. The recent volatility in the stock market is a reflection of some of the longer-term issues that the Chinese Government face. The imbalances in credit, savings and real estate which have built up during this period will have a knock-on effect in the region and will call into question the ability of the government to control the economy.
To what degree is Asia’s growing middle class influencing business thinking?
The inexorable rise of the middle class in Asia is happening fast, and it is important to look at developments around the Asian consumer. By 2030, 64% of the global middle class will be in Asia, and it will account for 40% of global middle class consumption. In addition is the growth of a significantly younger population in parts of Asia. The younger demographic is making choices and influencing buying patterns that are totally different to the previous generation. This is already evident in the explosion of the online economy in China, India and South East Asia. Mobile banking, too, in Asian and African economies is far ahead of Western countries. We see big opportunities in a more socially inclusive, digitally connected economy, which is opening up the world in a way that couldn’t be imagined even five years ago.
Is the increase of outbound investment from Asia a trend to watch?
Chinese companies have been making some large investments in the UK, and in 2014, the Bank of England and the Bank of China signed an agreement to create a more open, transparent trading platform for the settlement and clearing of Chinese investments. At the time of the agreement, 62% of RMB payments outside China were already taking place in London. The UK is also actively seeking investment from across Asia. Toyota, for example, is opening large plants in the north of England and Scotland, while the large Asian sovereign wealth funds are now seen as sensible long-term investors.
Alliance Trust emphasizes responsible investment, where are the potential opportunities in Asia?
There will be a quantum shift in terms of environmental awareness in the coming years. A lot of growth in emerging economies has been at the expense of the environment, and that needs to change. China must convert to a greater percentage of gas usage, and not coal, and India must find new solutions, as 13 of the world’s top 20 most polluted cities are in India. This will provide investment opportunities in different fuel sources and emissions control technologies, and will require governments to act differently. But responsible investing is not just about the environment. We also consider how business models can be more sustainable. An example is in Bangladesh, where we have marshalled around USD 1 trillion in investible assets pertaining to working conditions and supply chains in the garment industry. The goal is to create better, safer conditions for employees, which will produce sustainable long-term growth for the local economy.
Dr. Beh Swan Gin is Chairman of the Singapore Economic Development Board (EDB), the lead government agency that plans and executes Singapore's economic development strategies. Dr. Beh joined EDB in 1992 and has held various portfolios over the years.
How important is intra-regional trade to strengthening the economic core of Asia?
Intra-regional trade has grown significantly. This is not just trade with China, as trade between North East Asia and South East Asia has expanded significantly over the last decade. For example, ASEAN-Japan trade has doubled, while ASEAN-Korea trade has increased fivefold. The UN’s Regional Development Unit observed that intra-regional FDI investors are increasingly replacing investors from Europe and the US. Japan, Korea and China are now the top sources for intra-regional greenfield FDI.
Increased cross-border trade and investment can provide the impetus for structural reforms. The ASEAN Economic Community (AEC) has helped to reshape policy debates in its member countries, and aligned their domestic regulations with international commitments as reflected in the goods, services and investment agreements in the ASEAN Economic Community. ASEAN’s ability to realize its potential depends on these efforts. Individually, many of the ASEAN countries are too small to be game changers globally. But as an integrated region, we can benefit from leveraging our collective strengths to respond to external challenges and opportunities.
How crucial is digitization to enhancing business processes in Asia?
Today, many digitally advanced brands are deploying social media to understand and respond to changing customer demands, while governments are leveraging sensor networks to anticipate events such as traffic congestion.
Singapore recognizes that digitization has enormous potential for improving the lives of our citizens. The Smart Nation programme was conceived in 2014 to harness information and communication technology networks and data to create solutions that address everyday needs. With this programme, Singapore is well positioned to be a living laboratory for companies to innovate and capitalize on the rise of digitally connected cities around the world.
At the EDB, we are also working with leading industry players to look at how the internet of things, cyber-physical systems and the pervasive use of robots will shape the future of manufacturing. We are pursuing the opportunities that digitization of the broader economy can bring about, to generate growth, efficiency and consumer benefits.
Infrastructure development will be a key driver of economic growth. How important will the new Asian Infrastructure Investment Bank (AIIB) be to support this process?
The AIIB is an important development for Asia. It is the first multilateral financial institution to focus on infrastructure development and connectivity in Asia, both of which are critical drivers in ensuring sustainable growth in this region. The region’s infrastructure needs are vast and varied, and countries need to address not just present demands but also meet future needs. Some USD 8 trillion of investments are estimated to be necessary by 2020. The AIIB could help catalyze these infrastructure investments by introducing new financing ideas and mobilizing private sector lending. All the prospective founding members have high expectations for the AIIB. We see it to be complementary to existing multilateral financial institutions, and anticipate that it will work closely with the World Bank and Asian Development Bank, both of which have also expressed interest to collaborate with the AIIB.
What could be the impact of increased investment flows between Asia, Europe and North America?
We are seeing continued interest among regional and global investors to participate in Asia’s growth. From 2010 to 2013, Singapore’s asset management industry recorded an average growth rate of 10.7 percent per annum in terms of assets under management, reflecting a strong and sustained increase in funds sourced from the region and beyond. Of the total assets under management, approximately 56 percent was sourced from the Asia Pacific region. In fact, the Korean National Pension Service will be opening its third office in Singapore. I do not have the data on investment flows from Asia into Europe and North America, but a two-way flow of investments is healthy and should be encouraged as it will bring our economies even closer together.
How should global companies approach the new economic influence of Asia?
I think it is worth listening to viewpoints from Asia, as well as from Europe and North America. Recently, I attended a meeting organized by the Singapore Economic Development Board for business leaders from across Asia. The way they look at the world is very interesting, as they compare strength in leadership and economic power.
So in Asia, President Xi Jinping in China, Prime Minister Shinzo Abe in Japan, and Prime Minister Narendra Modi in India are strong leaders with a clear mandate to drive economic growth. President Putin is seen as a strong leader but Russia is a less strong power, and in the US they see a strong power but not a strong leadership in President Obama. Coming from Europe, but being Asia-focused in our business outlook, you find that Europe is discussed when talking about German machine tools, the difficulties of selling French cognac, or the appeal of Swiss watches – but not about real political power in Europe. It is an intriguing view of the world, and one that company leaders doing business in Asia should try to understand.
What opportunities will be created by the ASEAN Economic Community (AEC)?
Thirteen years ago when creating DKSH, we made a strategic decision to carve out a niche, specialized strategy for India and China, and develop a capillary mass market penetration strategy for ASEAN, where we were already market leaders. It raised eyebrows, because ASEAN was not uppermost in everyone’s mind. Many businesses were looking to China, as it had just joined the World Trade Organization (WTO).
Now, with the ASEAN Economic Community (AEC) being established by the end of 2015, ASEAN plays an important role for regional and global trade. The AEC is an interesting model, and it has learned from the EU about the structures that have and haven’t worked. So, the AEC will not create a fiscal union or common currency. But reducing tariffs, making it easier for capital flows and human resources to move between countries are important. The real enabler for being more competitive is that ASEAN countries are moving away from being the extended workbench of the west to becoming self-sustained, growing economies in their own right. This process is fueled by strong growth in intra-Asian trade, and Market Expansion Services companies are playing an enabling role on the ground.
How is consumer demand impacting business decisions in Asian markets?
As Asian markets develop, companies are adapting their products to meet different consumer preferences. Our business is positioned very close to the daily needs of people, and we help our clients reach consumers not just in supermarkets but in small mom-and-pop stores, pharmacies and hospitals. Across the region, customer habits and spending power are changing. But when we talk about the rising middle class in Asia, we are not just talking about people who can buy a BMW 5 Series or a Montblanc pen. In Myanmar or Cambodia, for instance, new customers are ready and able for the first time to use Nivea sun cream or to buy a Mars chocolate bar as a treat.
At DKSH, we aim to focus on our strengths and be a step ahead, to be able to advise our clients of changes in different markets so they can adjust their strategy accordingly. Traditionally, as a trading company, we were very client-centric – the extended arm of manufacturing companies bringing products into Asia. We still regard the client relationship as very important, but at the same time we have become more customer-centric. Moving the company to a more balanced approach means we can assist our clients to get closer to their own customers, which is important as markets get more competitive and consumer behaviors change.
Do you see Asia being at the forefront of the digitized economy in future?
Yes, although different countries are at different stages of digitization. At DKSH, we aim to offer our clients access to the consumer in a very focused way, by utilizing the digital channel in addition to modern and traditional channels as part of a balanced omni-channel strategy. Definitely, I see Asia, and especially China with companies such as Alibaba and Tencent, as a forerunner of this implementation.
China has surpassed everything outside of Silicon Valley. In terms of the penetration of digital business, it is happening at a speed where China is leapfrogging developmental stages that we experienced in the west. If you consider a company like Alibaba, it does have the benefit of a huge home market, but it continues to grow at a rapid rate. The impact of Alibaba’s success in China is now being felt as it expands and invests across Asia, and worldwide.