Pacific Exchanges

In the next two episodes of our series Rethinking Asia, we look at the issue of China's rising debt. In this first interview, we spoke with Yukon Huang, a senior fellow with the Asia Program at the Carnegie Endowment for International Peace. A renowned expert on China's economy and its global impact, Yukon formerly served as the World Bank's country director for China.

Yukon walked us through the recent growth and composition of China's debt, and why he is more worried about the structural issues behind the debt than the overall level. He also highlighted several important distinctions, such as the large role of shadow banking and the property market, that make China's debt situation different compared to that of most emerging markets. Some of Yukon's main takeaways include:

• While China's total debt-to-GDP ratio has rapidly increased about 100 percentage points since the Global Financial Crisis, the level of debt is reasonable for an economy of its structure and nature.
• The surge in debt levels is partly driven by the increasing prices of property-related assets in a country whose private property market only emerged roughly 15 years ago.
• The primary issue surrounding the surge in debt in China is more of a structural fiscal issue than a financial one: without sufficient tax revenues, local governments use land as collateral and borrow through opaque shadow banking activities to meet obligations.
• Unlike other debt-fueled emerging market expansions, the bulk of China's debt is denominated in its local currency and China's big state-owned banks steer too much funding into infrastructure at the expense of the private sector.
• A balanced approach by Chinese policymakers to financial sector deleveraging will restrict speculative shadow lending while ensuring private firms and local governments can access credit for innovative projects and public services.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode of our series Rethinking Asia, we spoke with Frederic Neumann, Managing Director and Co-Head of Asian Economics Research at HSBC. Currently based in Hong Kong, Fred previously taught graduate level courses at schools in the United States and holds a Ph.D. in International Economics and Asian Studies from the Johns Hopkins School of Advanced International Studies.

Fred guided us through the complex economic dynamics at play between China and ASEAN members. We learned why intra-Asian trade is expected to increase as more trade agreements are signed within Asia, and how China's Belt and Road infrastructure investment can best help Southeast Asian economies. Some of our main takeaways from our exchange with Fred include:

An earlier period of fierce competition between China and Southeast Asia has given way to an era of greater complementarity with many areas of mutual benefit in the region including increased trade and tourism and integrated supply chains.

• However, as many ASEAN economies now have lower average wage costs than China, supply chains are diversifying into Southeast Asia and increasing intra-Asian trade.
• U.S. reluctance to join the two major multilateral trade agreements in Asia is accelerating regionalization, or regional engagement and integration fueled by greater economic codependence within Asia.
• Chinese Belt and Road investment in Southeast Asia can alleviate domestic constraints in engineering know-how and capital availability to improve infrastructure and link markets, particularly if it steers clear of prestige projects.
• A rapidly aging Northeast Asia will raise labor costs and domestic savings, thus paving the way for more foreign investment to flow into relatively younger Southeast Asian economies.
• Across Southeast Asia, macroeconomic fundamentals remain sound overall; however, current account deficits in Indonesia and the Philippines appear most vulnerability to global threats.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode of our series Rethinking Asia, we interviewed Kathy Matsui, vice chair of Goldman Sachs Japan. She is a prominent advocate for women in the workforce, serves as a policy commentator for Japan's Cabinet Office and has served on multiple Japanese government committees aimed at promoting gender diversity. Kathy guided us through the combination of factors that have led to the current gap between the high skill and education levels of Japanese women and, in many cases, their absence from full-time work. She explained how changes in Japanese government policies and society are addressing this disconnect, and why empowering women is only part of the solution to Japan's demographic crisis. Some of our main takeaways from our conversation with Kathy include:

• Various factors led to this gap between high skill and low participation: insufficient "infrastructure," such as daycare, prevented many Japanese women from returning to work after giving birth; unaccommodating employer policies have discouraged women's attempts to re-enter the workforce; and societal preferences have long favored women who opt to stay at home.
• Government efforts to improve daycare options and a marginal increase in temporary work visas have helped reverse the trend. However, improving female labor participation is just one prong of a coherent strategy that will be required to tackle a broader demographic challenge and labor shortage.
• Gender diversity targets are smart long term goals in the private sector. Gender quotas should be considered in the public sphere, at least temporarily, to ensure public policy decision-making processes accurately reflect the population.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode, we continued our ongoing series on fintech in Asia by interviewing Simone di Castri, the Managing Director of the RegTech for Regulators Accelerator (R²A). The mission of R²A is to enhance the capacity of financial authorities by harnessing innovative technologies and accelerating promising RegTech (regulatory technology) solutions.

Simone guided us through some of the biggest challenges facing financial authorities, and what technological solutions R²A has been developing to help regulators in emerging markets. R²A has so far been focused on enhancing the capabilities of financial authorities in Mexico and the Philippines to better understand markets and customer needs in data-rich environments. Some of our key takeaways include:

A critical challenge in banking supervision is the time and resources required to manage and validate data collected from financial institutions; R²A is solving this using APIs that connect the central bank to financial institutions.

• In the Philippines, R²A is prototyping a smartphone chat bot powered by machine learning that will enable any citizen to escalate a problem with their financial provider to the consumer protection team at the central bank.
• Emerging and frontier markets are a natural fit for these new tools and techniques given the importance they place on financial inclusion and resource constraints that encourage innovation.

Fast-moving fintech actors have helped spur financial authorities to be more proactive in adopting new technologies in oversight and regulation.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode, we continued our ongoing series on fintech in Asia by interviewing David Hardoon, the Chief Data Officer of the Monetary Authority of Singapore (MAS). We spoke with him about the innovative uses of machine learning and the leveraging of big data among banks and the financial system more broadly.

David walked us through how the new Data Analytics Group at MAS is approaching the ethical use of data when so many financial institutions are employing new AI applications. We also discussed the need for awareness of the potential for unsupervised algorithms to either help or hinder financial inclusion. Some of our key takeaways include:

One MAS initiative, FEAT, is focused on four guiding principles for financial institutions concerning the usage of data in AI innovations: fairness, ethics, accountability, and transparency.

• Machine learning can be applied in wide range of financial services from insurance to wealth management, for example, by using behavioral data to lower premiums and by offering algorithm-based robo advisory services that market services to a wider swath of people.
• Regulators ought to ensure financial institutions understand the risks involved in using algorithms and unsupervised machine learning – are these risks acceptable?
• Applications of AI – artificial intelligence – will more likely augment, not replace, financial jobs of the future. The technology is likely to transform the services provided by banks and the roles of bank branches, and will alter the relationship between banks and customers and underscore the importance of data.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In this episode, we revisited the topic of fintech in Asia by interviewing Sean Creehan, a senior analyst and our colleague here in the Country Analysis Unit. We talked with him about a recent paper he wrote on the how digital innovation can improve financing for small- and medium-sized enterprises (SMEs) in Asia. Sean helped us understand why SMEs, despite their essential role, receive a disproportionately small share of credit from the financial system. We also unpacked the many ways in which new financial technologies and innovative business models can boost SME access to credit and enlarge the pie of economic growth in Asia.

• In Asian economies, SMEs typically create at least 50% of new jobs and represent over 40% of GDP, yet receive less than 20% of total bank credit.
• The SME credit gap persists because providing financial services to SMEs often involves greater costs and higher risks than lending to larger customers.
• Emerging financial technology can support credit to small businesses by significantly lowering costs and through alternative data that improves banks' ability to assess the risk and credit profile of smaller borrowers.
• New fintech applications like blockchain have the potential to improve efficiency in trade finance transactions and integrate more Asian SMEs into the global supply chain.
• The increased standardization of commerce on digital platforms in Asia will help SMEs broaden their economic impact by gaining access to more liquidity and investment capital.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In the fourth episode of Rethinking Asia, we interviewed Matthew Goodman, the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS). At CSIS, he leads the Reconnecting Asia program, which tracks how infrastructure is shaping economic and geopolitical realities in Asia.

Our discussion touched on Asia's huge demand for new infrastructure and the complex geopolitical tensions among regional and multilateral actors. Matthew addressed how countries deal with the risks associated with these large projects and unpacked the role of national strategy, including China's Belt and Road Initiative. Some of our key takeaways include:

• The Asian Development Bank estimates that between 2016 and 2030, Asia needs $26 trillion of infrastructure investment to reduce poverty and expand growth.
• International investors see infrastructure projects as a source of long-term return, but often must contend with underlying issues of corruption, land rights, and political risk.
• While donor countries seek to lead infrastructure projects to gain commercial or geopolitical benefits, recipient countries pursue projects for growth and domestic political support.
• Japanese banks lead the world in infrastructure financing, but recent Chinese efforts – the Belt and Road Initiative and the Asian Infrastructure Investment Bank – are expanding trade connections and raising China's profile in developing countries.
• Most global trade currently takes place via sea, but improved land-based transportation infrastructure in Asia may mean more commerce travels over upgraded freight and truck networks.
• To plan and finance physical infrastructure, countries also need many forms of soft infrastructure, like functioning capital markets, customs procedures, credible legal and regulatory regimes, and human capital.

In our third episode of our series Rethinking Asia, we spoke with Andy Rothman, an investment strategist for Matthews Asia. Prior to joining Matthews Asia, he worked for 20 years in China, and now uses that experience to shape the firm's thoughts on China from an investment perspective.

Andy helped us understand the growth and current state of Chinese domestic consumption. We discussed China's efforts to rebalance away from investment and exports towards consumption, and what future growth will look like in China. Some of our main takeaways from our conversation with Andy include:

• In 2017, two-thirds of economic growth in China came from consumption, largely because of households.
• Household incomes have risen by 120 percent in the past decade, compared to nine percent over that period in the U.S.
• Driven by smartphone adoption and non-cash payment platforms, online retail sales in China have continued to experience incredible year-over-year growth.
• This healthy consumer story is supported by Chinese households' habit of saving 30 percent of their incomes ­– to pay for education expenses and compensate for a weak social safety net – and by their sunny outlook on future growth.
• In Rothman's view, elevated consumer spending on housing is less likely to cause a crisis because, unlike in the U.S. housing market of the 2000s, Chinese buyers must put down a minimum 20 percent down payment and bank due diligence is quite strict. Aging demographics in China have put an end to double-digit growth rates, but real estate isn't the ticking time bomb most predict.
• The government's consistent measures to raise the minimum wage have nudged all wages higher and have had an outsized impact on the rebalancing to consumption.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

In the second episode of our series Rethinking Asia, we spoke with Manoj Pradhan of Talking Heads Macro in London. He's an expert in the relationship between demographics and capital markets, looking at how aging and labor force changes impact everything from global interest rates and wages to inequality. Prior to his current role, he worked as a macroeconomist at Morgan Stanley.

Manoj gives us unique perspectives on how changing demographic trends in Asia will likely affect future inflation and wage growth. We also discuss the challenges posed by aging demographics and automation. Some of our key takeaways from the exchange with Manoj include:

• The enormous growth of the global labor supply in the 1980s and 1990s—driven in large part by the integration of China's labor force—is now reversing. Demographic changes in Europe and Asia will likely upend most people's expectations regarding future inflation, interest rates, and financial market risks.
• Demographic transitions and smaller labor forces are expected to raise inflation and limit central banks' ability to rein it in without curtailing economic growth.
• Within Asia, demographic trends are not uniform: north and east Asian countries are aging quickly while countries like India and Indonesia are benefiting from a demographic dividend, and their growing labor force could make those countries new global manufacturing hubs.
• An aging and shrinking work force in China is leading to wage growth and helping the economy rebalance by supporting greater consumption as a share of GDP.
• Countries like Japan and Korea face several demographic challenges related to aging: more workers will need to shift into jobs related to aging, governments will be pushed to consider policies to reallocate resources to alleviate inter-generational inequalities, and societies will need to adjust to permanently smaller labor forces.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

Today, we launch a new series, Rethinking Asia, as we consider noteworthy and unusual trends in Asian finance and economics. In our first episode, we sat down with Jesper Koll, head of Japan at WisdomTree, a global asset manager. In our conversation, Jesper explains in depth the history and forces behind Japan's distinction as a safe haven for global investors. He explains why assets like the yen and Japanese government bonds rally during periods of regional or global turmoil.

Some of the key takeaways from our conversation with Koll include:

• The Japanese yen has been known for some time as a safe haven currency; when global investors are in risk-off mode, the yen strengthens.
• There are a few forces behind the safe haven status: as one of the predominant funding currencies of global financial markets, investors borrow in yen to invest in higher yielding assets during periods of calm. However, during periods of volatility, investors unwind those positions to close (pay back) open yen positions, causing the yen to appreciate.
• In addition, there is the market perception that Japanese asset managers (such as pension funds and insurance companies) repatriate their portfolios back to Japan during crises causing yen appreciation. However, this has been proven to be more myth than reality.
• The yen's liquidity –it is one of the few deep, liquid, freely traded currencies in the Asian time zone—makes it a candidate for funding positions and also exacerbates reactions during periods of risk-off sentiment.
• Given the increasing importance of China to the global economy and continued restrictions on that country's capital account, Japan is experiencing more volatility when investors react to events in China.
• The Swiss franc behaves much like the Japanese yen. Like the yen, the franc is a funding currency for international speculators. It acts like a safe haven asset, and appreciates during bouts of market volatility.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.