14 Jan A Trump Administration Might Be The Catalyst Asia’s Financial Markets Need For Change

Since the 1990s, attempts to modernize Asian financial systems have been interrupted—twice— by globalscale financial crises. In both cases, the mechanism was levered carry trades, meaning the cause is most likely a system design flaw. Crisis should have motivated a fix, especially in Asia where the financial model was borrowed rather than invented; but it didn’t. Donald Trump’s ascendancy to the U.S. presidency this year may just be the surprise trigger of financial system change for Asia.

A flawed paradigm?

Asia’s movement towards financial market liberalization (call it the AngloSaxon model with an American accent) dates back to the Reagan era. In phases and across Asian markets, private sector banking scaled up; banking and securities laws modernized; new exchanges and contract markets were launched; currency and asset markets opened to outside investment; and tertiary graduate finance programs were established to localize Western financial expertise. The shift was a natural complement to the trade agendas the exportoriented Asian economies were embarking on.

But this economic openness also made the larger, transitioning Asian economies more vulnerable to financial instability. Money flowed rapidly unimpeded between asset markets seeking alpha, without engaging the local grassroots. The Asian Crisis (19971998) and the Global Financial Crisis (20072008) were two such periods of elevated instability that cost ordinary people their wealth and in some instances undermined their trust in government.

For example, individual investors in risky bonds sold by UBS, Lehman and Citibank took to the streets in Hong Kong, Singapore and Indonesia to protest their loss of wealth. Individual investors in toxic Lehman minibonds totaled 48,000 in Hong Kong and 51,000 in Taiwan. In May 2009, about a hundred diehard investors in Hong Kong marched on government, petitioning fair compensation for their “Lehman valueless paper bonds”; and in October, individual investors demonstrated publicly in front of Taiwan’s financial regulator and accused it of siding with the banks. Yet, the roll out of the AngloSaxon paradigm continues. As of 2014, McKinsey’s comprehensive report Debt And Not Much Deleveraging showed Asian economies still evolving along a path of leveragefueled growth. China’s recent decision to build up assetbacked securities (ABS) is another case in point. Logically, ABS did not cause the Global Credit Crisis, but something about ABS was a catalyst. Uncertainty over how vulnerable China is to that catalyst lingers.

Changes thanks to Trump

For decades America has been a bastion of the informational transparency said to bring positive capital market externalities: liquidity, growth, confidence. The spirit of openness is unlikely to prevail in the new Trump administration, which is not on record as a champion of free markets or information.

Indeed, Presidentelect Trump’s cabinet choices and his wheelerdealer negotiating style foreshadow big changes in the financial paradigm. It is rapidly shifting towards something—what, we don’t yet know yet, but involving most likely stimulus, protectionism and possibly elements of the 19thcentury U.S. robber baron model. Rises of U.S. interest rates will accelerate the rate of change.

Ford’s recent decision to cancel plant production plans already underway in Mexico is a harbinger of what Trump’s economic vision could mean if U.S. companies abruptly cancel contracts and pull up stakes in Asia. Shocks would reverberate through stock markets first, but contract rescission undermines trust and potentially is the most disruptive to debt capital. As the U.S. corporate supply chain deglobalizes, dollars come back onshore and the sharing of technical knowhow in a distributed economy erodes, the AngloSaxon financial paradigm is likely to lose relevance. Once the era of cheap information and safe investment dollars comes to an end, rational Asian economies will begin to wean themselves from dependence on the AngloSaxon paradigm that made it attractive. Then, American finance must begin to confront an Asia we don’t know.

How our theories fall short

Our sense of Asia has been defined mostly by an engagement of opposition. After the late 1990s, ”Asia” was China. In the 1980s, it was Japan. In the 1970s, it was Vietnam. In the 1950s, Korea. Other countries at the periphery of our consciousness are defined by our import patterns; whatever details haven’t fit neatly into our homecentric perspective we have chosen to ignore.

But Asia’s patchwork quilt of financial markets defies oversimplification. The UN says there are 48 countries in Asia, including what we call the Middle East but which we should be calling “West Asia.” Each has a financial system where borrowing and lending take place in patterns that bear little resemblance to our theories.

Consider religion, which scarcely figures in the AngloSaxon model of finance. It matters deeply in some Asian financial markets, because Islam prohibits the charging of interest. If global demand for energy and money rises, asset prices become volatile and America turns inward after Trump takes office, the Asian financial axis connecting Oil States to China and Hong Kong could bypass the West altogether as a conduit of capital. In this scenario, Malaysia’s prominence as a financial center would be elevated, and the mix of debt and equity finance would change abruptly.

Consider also the historically challenging impact of language diversity on communication and trust formation between Asian markets. There was a time when English played a significant role because it was a common conduit of information that captured perfectly the logic of AngloSaxon financial thinking. But increasingly, language and cultural diversity can be viewed as sources of wealth. Asia’s evolving food, music, art, literature and fashion scenes are at the center of local economic vibrancy. Asian millennials, whose demographic is techsavvy, connected and relentlessly entrepreneurial, are building up regional networks of money and trust by collaboratively creating grassroots ondemand services. Money and trust are the essence of sustainable debt capital.

Regardless of how you see Asian finance taking shape in 2017, it’s a good bet that Asia’s new valuescentric financial system model will have solutions outside the periphery of the AngloSaxon financial system blueprint.

-Ann Rutledge, CSC