Asia At Forefront Of New World Order As Power Balance Shifts

Source : The Straits Times, Dec 31, 2007

WHILE the year is going out in a blaze of headlines about the sub-prime crisis and its devastating impact on financial markets, 2007 will eventually be noted for other reasons, too.

Chief among them is the emergence of a new world order where Asia - especially China - has become a dominant economic force.

The events that brought this about are clear-cut: the huge initial public offerings in Shanghai and Hong Kong, as well as soaring trade and booming share markets for much of the year.

A far more important driving force, though, has emerged - due to the sub-prime crisis.

The devastation set in motion by the meltdown in the United States mortgage market has resulted in something that would have been deemed absurd even a year ago - proud Wall Street banks going cap in hand to Asian investors.

Anyone recalling the humiliations suffered by Asian nations during the 1997 financial crisis will recognise the irony of this.


Looking to region

IN RECENT months, Citigroup, Morgan Stanley, Merrill Lynch and UBS have all turned to Asia for much-needed funds to shore up their shaky capital bases after losing billions on sub-prime bets.

In their desperation for cash, some have even counted as a resounding coup their ability to sell slices of themselves at hefty price discounts to their July highs.

During this tumultuous period, Singapore grabbed headlines worldwide after the Government of Singapore Corporation (GIC) and Temasek Holdings both bagged sizeable stakes in global banks.

GIC has paid 11 billion Swiss francs (S$14 billion) for a 9 per cent stake in UBS, which runs one of the world's largest wealth management operations.

Temasek's US$4.4 billion (S$6.4 billion) buy into Merrill Lynch will allow it to make inroads into Wall Street and give it exposure to the world's largest brokerage firm, one whose network spans the globe.

These purchases formed part of a mega fund-raising drive by cash-strapped Western banks, which resulted in China Investment Corp taking a US$5 billion stake in Morgan Stanley and an Abu Dhabi fund injecting US$7.5 billion into Citigroup.

And this trend looks set to continue, as more troubled Western financial institutions head into the market to raise funds in the coming months.

It will pave the way for Asian sovereign wealth funds, with more than US$3 trillion at their command, to invest in prized Western assets at bargain prices.

As this new world order crystallises, with countries such as China and India continuing on their march towards becoming economic giants, it is worth reflecting on how unlikely this scenario would have seemed even a few years ago.

Few could have imagined that Wall Street titans would look to Asian sovereign wealth funds for help, just as few would have expected the entire region to rebound as it has from near-calamity.

Consider the run of successes this year.

New listings in Shanghai alone raised US$60 billion, while China oil major PetroChina overtook ExxonMobil as the most valuable company on the planet. Industrial and Commercial Bank of China became the world's largest bank by market value.

The year also marked an extraordinary period of outperformance for Asian stock markets.

Although there was a big sell-off in August, as sub-prime woes soured the appetites of investors, Asian markets soon experienced a new boom, sparked by a promise from China that it would allow mainland investors to buy shares directly overseas.

While renewed credit woes concerns have taken some of the shine off recently, regional stock indexes will still end sharply higher for the year.

Since January, China's Shanghai Composite Index has surged by 97 per cent, while Hong Kong's Hang Seng Index has risen by 37 per cent.

In Singapore, the benchmark Straits Times Index (STI) repeatedly smashed records, hitting an all-time intra-day high of 3,905 points on Oct 10. Although it has since fallen 12 per cent from its peak, the STI is still up 16 per cent for the year.

In contrast, the Dow Jones Industrial Average in the US is up only 8 per cent this year.

Heady role reversal

NOW go back a decade. Asia was then in the midst of a financial crisis that some described as the worst since the Great Depression in the 1930s.

As the crisis took hold, cities such as Jakarta were racked by riots, fuelled by plummeting wages and soaring unemployment.

Billionaires were reduced to paupers literally overnight after plunging local currencies forced many of them to default on their US dollar loans.

Against the backdrop of allegations that Wall Street financiers were bankrupting the region by orchestrating attacks on Asian currencies, banks and other prized assets were sold - often at bargain basement prices - during the restructuring that followed the initial havoc.

It was a time when cash-strapped Asian nations could not raise even a murmur of protest over the harsh terms imposed by the International Monetary Fund if they wanted to get the loans they so desperately needed to repair their battered economies.

Ten years on, Asian nations are no longer downtrodden supplicants forced to do whatever they are told.

Chastened by the humiliations suffered during the Asian financial crisis, many nations now sit on hefty cash hoards, buoyed by an economic boom brought about by soaring commodities prices and fast-accelerating consumer consumption on the domestic front.

So while sub-prime hogs the headlines, it is worth taking a step back to note that the region's stellar economic performance has triggered a shift in the balance of power.

That is the real story of this year.