If there was one message to come out of the Asian Financial Forum (AFF) in Hong Kong last week, it is that things are looking up for the global economy. The risks that exist have more to do with politics than economic growth.
The next 12 months should bring relatively stable growth in China, other parts of Asia, North America and Europe, powered by ongoing improvements in economies around the world and a significant dose of innovation in areas from technology to finance.
That seemed the fairly consistent message from the forum, the giant annual gathering in Hong Kong of finance and business professionals, economists and policymakers, held on Jan 15-16. The theme of this year’s event, Steering Growth and Pioneering Innovation: Asia and Beyond, was appropriate to the mood.
For Asian economies, the prospects are also positive, particularly for economies linked to China.
“Driven by synchronized growth across trade, investment and industry, the markets have been on a bull run for a long stretch,” said Vincent Lo Hong-sui, chairman of the Hong Kong Trade Development Council.
“Added to this has been low inflation and monetary policies that have helped businesses, markets and investors alike. Advances in technology have also brought fresh impetus to growth. I believe the key to sustaining the momentum for growth lies in investment and innovation.”
Innovation and technology are helping drive business growth and motivating leaders throughout Asia and beyond to pay more attention to investment in these areas. Hong Kong offers an almost ideal example for the region of how to benefit from technology.
“In Hong Kong, we encourage financial institutions to innovate and apply technology to enhance their operations and offer novel products and services to enhance customer experience,” said Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor as she opened the AFF, setting the tone for the forum’s two days.
“Seven banks in Hong Kong have decided to develop a trade finance system named the Hong Kong Trade Finance Platform (HKTFP) to digitize and share trade documents and automate processes. Simply put, it means faster and more efficient processes with lower cost, as well as reduced risks and frauds.”
The focus on technology and the sheer potential of its markets has made Asia a magnet for the best companies in the world and, increasingly, the birthplace of many. Of the top 500 global companies ranked by Fortune in 2017, 194 were Asia-based, up 56 percent from a decade ago.
“Amid the improving global economic environment, Asia is taking center stage in terms of growth and potential … Zooming in further within Asia, the impact, scale and importance of China for the continent and the whole world speaks for itself,” Lam said.
Much of this growth and attraction is driven by China. According to the International Monetary Fund, China is a key partner for more than 100 countries that represent 80 percent of global GDP. The growing Belt and Road Initiative, the signature trade and connectivity plan first launched by Chinese President Xi Jinping in 2013 that spreads across more than 60 countries in Asia, Europe and Africa, has emerged as an important catalyst of growth.
Hu Huaibang, chairman of the China Development Bank, said that his bank had extended US$110 billion in loans to projects along the ancient Silk Road trade route by the end of 2017.
“China is at the center of the global supply chain. Many countries want to take advantage of the (Belt and Road) Initiative,” Hu said.
Between 2014 and 2016, China invested US$50 billion in countries that are involved in the initiative, with trade volumes reaching US$3 trillion, he said.
China now plans to invest another US$150 billion in the next five years and import products worth US$2 trillion from these countries.
In 2015, China led the creation of the multilateral Asian Infrastructure Investment Bank (AIIB). Many see this bank as another step in the growth of China’s global influence.
“In some aspects, one country is playing a leading role, in other aspects the same country may need aid from other countries,” said Jin Liqun, the AIIB’s president. “This is a new type of relationship for the 21st century.”
David Lipton, first deputy managing director of the International Monetary Fund, said: “China has a window of opportunity to accelerate economic reforms that can secure sustainable and inclusive growth.
“China has made considerable progress in this area, as our recent assessment of its financial sector shows. But it is essential to sustain this effort to ensure that financial instability does not undermine the country’s extraordinary economic and social progress,” Lipton said.
This expectation of greater Chinese involvement in the global economy is widely shared. And it is creating multiple opportunities for investment.
“China’s overseas investment continues to grow, even though it slowed down in 2017 due to capital controls. But the number of contracts signed is actually higher, (and) private companies are getting involved more,” said Hu Yifan, regional chief investment officer and chief China economist at UBS Wealth Management.
“(Hong Kong) has strength in finance, wealth management and is a super connector. It plays a special role in financing. Guangdong boasts manufacturing and high-tech innovation. Macao has a diversified entertainment industry, which is also worth looking into for investment opportunities,” said Hu.
“Southeast Asia has benefited from low value-added industries such as the manufacturing of shoes and clothes that countries have taken over from China,” she added. “Due to their advantages in human resources, industries have shifted toward Southeast Asia.”
But even as industry spreads out of China to the many other economies in the region poised to benefit from its growth, the influence of the regional linchpin continues to grow. And as China grows, so does the use of its currency, the yuan.
“The RMB is used increasingly as part of central banks’ foreign exchange reserves; for example, the European Central Bank included the RMB,” said Andreas Dombret, a member of the executive board at Deutsche Bundesbank. “The notable development from the European point of view over the past few years has been the growing international role of the RMB in global financial markets.”
Stuart Gulliver, chief executive of global bank HSBC, said the internationalization of the yuan would gain further support from the Belt and Road Initiative, and the development of the green bond market in Asia.
“These initiatives will fuel the internationalization of the RMB. The RMB already has some momentum,” Gulliver said.
“As we continue to see the Belt and Road develop, and as we continue to see green finance develop, a lot of this will be done in RMB and this will increase the usage of RMB even further.”
While the economic prospects are generally positive, risks could emerge from the realm of geopolitics with the rise of populism in some areas, the potential for conflict in places like the Democratic People’s Republic of Korea and the US and “tumultuous politics” in some countries that could slow down reforms and growth, said former US Secretary of the Treasury Jack Lew, who held the job between 2013 and 2017.
“Investors face a challenge — where to find enduring fundamental value in a world where the forecast horizon is solid but could change dramatically if a major risk turns into a reality,” said Lew.
“Looking at the year ahead, I think the most likely outcome is continued broad and stable growth.”