By Liu Junhong
This month marked the 10th anniversary of the East Asia financial
crisis. The region has become the most dynamic one in the world in
terms of economic development. The World Bank recently published a
report hailing the "East Asia revival".
Compared with 10 years ago, however, the East Asia revival has
also given rise to a couple of new problems.
One is that since the Association of Southeast Asian Nations
(ASEAN) signed a bilateral agreement with China, Japan and the
Republic of Korea (ROK) in May 2000 (the Chiang Mai Initiative)
that allowed East Asia financial cooperation to deepen ahead of
regional economic cooperation, the region still does not have an
effective capital utilization system and Asian capital can only
find business opportunities in the United States.
The other problem is that, in the past 10 years, Japan has been
pushing hard for an East Asian order and a yen-circle strategy, but
the world's second largest economy has let its currency go into a
historic devaluation cycle while other East Asian currencies have
risen, leaving the East Asian monetary system without a
These two problems have made the East Asian revival America's
The tide of the "Asian dollar" has been surging as East Asia
left the (financial) crisis behind and enjoyed expanding trade.
As at end of 2006, the trade surplus-led East Asian current
account topped US$3.3 trillion; huge amounts of "oil dollars" from
the Middle East forced their way into East Asia; while Japan
released more than US$4 trillion as "yen arbitrage capital" at zero
This situation led to an influx of short-term capital into East
Asia that saw the region's foreign reserves explode to more than
US$30 trillion. An "Asian dollar" monster was born.
In the 1950s-60s, the advent of the Cold War and the "interest
barrier policy" of the US gave rise to a mighty "European dollar"
and the "European Yankee bond market", which became a major force
influencing the world financial order. Today, though there is an
enormous "Asian dollar" stacking up in East Asia, the region still
lacks the kind of financing channels available in Europe and thus
cannot turn its huge reserves into financial power.
The lack of investment channels has left the "Asian dollar" no
other way but to flow back to the US and become a global
If the birth of the "European dollar" was induced by
ideology-oriented political concerns, then the explosion of the
"Asian dollar" has been the result of "labor profit" born out of
In fact, when the Cold War between the US and the Soviet Union
ended in the late 1980s and early 1990s, a unified world market
took shape and East Asia stepped on the track of market economy.
The labor market that had been kept shut by ideology was liberated,
as an army of cheap labor attracted foreign capital into the
East Asia had become the world factory selling all kinds of
products directly to Europe and the US and a model of "investment
and export-oriented" economic growth.
Following the East Asia financial crisis in 1997, the aid
program led by the International Monetary Fund (IMF) further
strengthened this "investment and export-oriented" format and once
again turned the East Asian labor cost into America's dividend.
First, from August to December 1997, under an arrangement by IMF
with help from the US and Japan, Thailand, Indonesia and ROK
received a total of US$1.08 trillion. But, the IMF-led aid program
for East Asian nations came with some strings attached, such as
demanding receiving countries tighten their money supply and adopt
a budgetary squeeze, forcing East Asia to temporarily halt the
"consumption-led economic growth drive".
Second, IMF demanded the receiving countries free their trade
and capital markets, open up their financial capital markets and
replace their own with the American enterprise management model,
resulting in the return of US capital to East Asia ahead of others
to seize the regional low-cost advantage and a new investment
Third, the IMF-led aid program for East Asia coincided with the
IT bubble in the US before it burst, and the US consumer market
again became a receptor of cheap products from East Asia. Thus the
US was the first to milk the region's "labor dividend".
During the East Asia revival, the region's low-cost products
were exported to America in huge quantities under the "US-led free
trade system", resulting in the "offsetting of domestic inflation
with cheap imports" and allowing the US to keep its consumer prices
stable despite rising oil prices and an overheating property
This enabled the US to achieve sustained economic prosperity,
and it can be called America's "East Asian dividend".
Under scientific and technological innovations and an enormous
yet flexible financial system of the US, the "Asia dollar" born of
the East Asian "labor dividend", has been flowing back to the US
and reinvested in the most profitable regions in the world under US
The process has formed a US dollar-represented capital cycle
centered on New York and given vital US support for efforts to keep
its economic dynamics in balance.
Meanwhile, the back flow of the "Asian dollar", mostly invested
in treasury bonds and stocks, has brought low-cost benefits to New
York's capital market and raised the efficiency of capital
This has resulted in a very long cycle of low interest rates in
the US and provided relaxed financial conditions for US businesses
to make long-term investments and overseas takeovers as well as for
Washington to interfere away from home.
Against this backdrop, Japan, which has always sought to
challenge the US dollar's supremacy, has been forced to temporarily
shelve its "strong yen strategy" in order to compete against other
East Asian nations for the American market and to implement an
unprecedented yen devaluation tactic against the euro. This move
has inadvertently helped the US dollar maintain its "relatively
The 10-year revival of East Asia following the financial crisis
has not only brought America a huge "labor dividend" and "Asian
dollar" benefits but also a historic opportunity to thwart the
formation of a yen circle and secure the US dollar's position.
It can also be seen as a time when the US reinforced its
foothold in Asia and a fight for the Asian dividend against Japan,
or a duel of systems between the world's largest debtor country and
the top creditor country.
The author is an expert with the China Institute of
Contemporary International Relations.
(China Daily July 11, 2007)