We live in an age of globalization. Yet one major theme of this month’s East Asia World Economic Forum in Jakarta is regionalization.
As usual, the WEF is very savvy in its prognosis. In fact, I would go as far as to say that, how skillfully governments and businesses in East Asian emerging markets — including Indonesia — embrace and navigate regionalization over the next 18 to 24 months, will determine how well the region survives the transition to the “Post-Cheap Dollar Era.”
By now, most of us are keenly aware that the dollar has been relentlessly strengthening — especially over the past 12 months — against virtually every other currency out there, including the euro and the yen, and also against virtually all emerging market currencies like the Brazilian real, the Turkish lira and, yes, also the Indonesian rupiah.
The very sizable depreciation of the rupiah from the Rp 9,000 per dollar neighborhood to the Rp 13,000 per dollar neighborhood over the past two years is surely on all of our minds these days.
What do we have to do now?
The first answer is that all of us in East Asian emerging markets need to work as hard as possible to borrow and fund ourselves as much as we can in euro and yen and then use those euros and yen to pay off our increasingly expensive dollar debts.
The reason the dollar is “strengthening” is that the supply of dollars in East Asian emerging markets is shrinking fast.
Dollars have been flooding back to the US, chasing the stellar investment returns from a rapidly improving US economy. As we know from basic supply and demand, when the supply of something becomes scarce, its price goes up.
Dollars in the emerging markets are becoming scarce, so their value has jumped. Not only are our dollar debts becoming more expensive; finding the dollars to service those debts is becoming harder.
But another reason for dollar strength is euro weakness and yen weakness. In a stark contrast to America’s booming economy, the European and Japanese economies are relatively weak. In response to this economic weakness, the European Central Bank (ECB) and the Bank of Japan (BoJ) have over the last two years unleashed massive money-printing quantitative easing (QE) programs.
Printing euros and yen, the ECB and BoJ have sharply increased the quantity of euros and yen in the world. As the supply of euros and yen has expanded, their value has plummeted.
The massive increase in the quantity of dollars from 2008 to 2013 from successive dollar-printing QE programs from America’s Federal Reserve encouraged us to borrow in easily available and cheap dollars.
Therefore, the massive supply of cheap euros and yen from 2013 to 2015 should now be encouraging us to borrow in euro and in yen.
Much like the Fed’s dollar-printing QE program unleashed a flood of dollars into East Asian emerging markets from 2008 to 2013, the ECB’s and BoJ’s QE programs should be sending a flood of euros and yen our way today. Yet this is not happening.
One major answer is because those euros and yen have instead been flooding into the dollar and into the US — for now. Investors in Europe and Japan have been looking at the depreciation of emerging market currencies and slowing emerging market economies, and then at the rising dollar and the surging US economy. They’ve been heading to the US like everyone else.
However, this trend should very soon at least pause, because the flood of capital into the US will push US yields down quite low, and US asset prices up very high.
In the meantime, East Asian emerging market yields will have risen so much, and asset values in local currency will have become so cheap, they will once again look quite attractive to investors.
The second answer to what we need to do today is: the whole world, and especially East Asia, needs to reduce its dependence on the US dollar, and here the implication is both obvious yet daunting. The solution to East Asia’s over-dependence on the dollar is for China’s yuan, or renminbi, to play a much bigger role in East Asia.
China is by now the largest trading partner for most economies in East Asia. At around $10 trillion per year, it is now also by far the largest economy in Asia. It is only fair to say that all of us in East Asia now functionally pretty much live in the “Renminbi Bloc.”
Yet the vast bulk of our trade and investment is still denominated in dollars. This makes us vulnerable to the monetary policy of the faraway Federal Reserve, when the monetary policy of the nearby People’s Bank of China (PBOC) would be far more appropriate for most of us in East Asia.
The reason adoption of the renminbi is a daunting proposition is because we still have to build out the institutional infrastructure and the habits to facilitate trade and investment in renminbi, especially in Indonesia.
Rather than our traditional habit of pricing exports and imports in dollars, we have to start quoting them in renminbi. We have to start storing our cash in renminbi.
Since the renminbi is still tightly controlled and not freely convertible, it will require special arrangements with the PBOC and clearing banks like ICBC Bank or Bank of China.
The good news is the Chinese government is keenly aware of the urgent imperatives to popularize the use of the renminbi, and has been working hard for at least seven years, and continues to work hard, to internationalize the renminbi. Around 50 percent of Hong Kong’s trade with China is now reportedly settled in renminbi.
One upside for us in Indonesia and other East Asian emerging markets is that the internationalization of the renminbi will add a significant new source of financing and liquidity. In addition to the dollar, the yen and the euro, we would then be able to borrow in renminbi. We would be able to attract Chinese investors, who would pay renminbi for our assets.
Tom Lembong is the managing partner of Quvat Capital and a Young Global Leader of the World Economic Forum.
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