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 "linchpin".

These two problems have made the East Asian revival America's "Asian dividend".

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 interest.

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 headache.

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 globalization.

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 region.

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 trend.

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 market.

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 capital manipulation.

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 utilization.

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 strong position".

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)