The message was loud and clear at the 2010 Asian Financial Forum (AFF) in Hong Kong, an annual event that attracts more than 1000 bankers and financial professionals: the economic crisis that started in the US in 2008 and spread throughout the world is leading to a major shift in economic power away from Europe and the US to Asia, and particularly China.

“Asia has shown regional resilience,” said Donald Tsang, chief executive of the Hong Kong government. “Today, the international community expects Asia to rise to the challenge and play a more prominent role in the changing economic landscape.”

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During the AFF, Mr Tsang emphasised that now was the time for governments in Asia to co-ordinate economic recovery efforts.

“By working together, we can lay a solid foundation for sustainable economic development,” he said. “This way, Asia can play a more constructive role in re-engineering and reshaping the global financial architecture.”

He emphasised that a spirit of co-operation is gaining momentum, which will lay the foundation for sustainable development and reshape the global economic infrastructure. For example, the Association of South-east Asian Nations (ASEAN)-China Free Trade Area, which came into effect on January 1 this year, has the potential to rival that of the North American Free Trade Agreement (NAFTA) in trade volume.

Furthermore, Hong Kong itself offers a wide range of advantages as a low tax regime with no foreign currency control.

“Hong Kong is growing on its strength as a financial centre,” said Mr Tsang. “It has the right fundamentals to attract investors from all over the world.”

Particularly important is how Hong Kong has become a virtual testing ground for wider international use of the Chinese yuan, or renminbi. The Chinese government, through the Closer Economic Partnership Arrangement between the mainland and Hong Kong, now allows banks in Hong Kong to issue bonds, hold deposits, and settle trade with mainland China – all in renminbi.

 

Asset management centre

This is driving Hong Kong as a centre for asset management as well as spurring growth in its stock market. In fact, Professor K C Chan, Hong Kong’s secretary of financial services and the treasury, believes that with increasing trading, deposits will grow, leading to more financial services in the renminbi. In particular, he sees the bond market becoming “a deep market in Hong Kong”.

While the renminbi’s lack of convertibility on world markets insulated China from the Asian financial crisis of 1997/98, Chinese officials now recognise the need for the currency to be internationally accepted, especially if China wants to build Shanghai as a world financial centre on the scale of New York and London.

Consequently, a number of banks, including Hang Seng Bank (Hong Kong’s second largest bank) and HSBC, have been granted permission from the Guangdong branch of the

China Banking Regulatory Commission to open cross-city sub-branches in Foshan, in China’s Guangdong province.

“Last year we saw great progress in expanding renminbi products,” said Mr Tsang. “The government is pushing rapidly to expand the range of yuan-denominated financial services on offer in Hong Kong. This will improve the quality of banking in the region and make it an even more efficient, low-risk corridor for doing business.”

In fact, since China began this experiment by approving renminbi bond offerings in 2007, banks with branches in mainland China have issued a total worth $5.6bn in various tranches.

The larger goal, however, is to champion a move away from a dollar-centric world to one that embraces the yuan.

 

Bullish indicators

International Monetary Fund (IMF) managing director Dr Dominique Strauss-Kahn was also bullish on about Asia’s prospects and the larger global economic role it will play in the coming decades. This is shown by IMF 2010 growth rates that project only 0.6% for advanced economies; 1.4% for newly industrialised Asian economies; 4.7% for emerging and developing economies; 7% for developing Asia (excluding Japan); and a whopping 8.5% for China.

“This means that countries in Asia will be able to exit stimulus measures earlier than those of advanced economies,” Mr Strauss-Kahn said. But the IMF chief cautioned against exiting stimulus too fast.

“In Japan, for example, most support has come from public support; private demand is weak,” he said. “This makes stimulus somewhat useless. A jobless recovery means we are not out of the woods.”

While much has been said about high unemployment rates in the US and Europe, even China is experiencing higher unemployment – the result of the Western world purchasing fewer of its products.

 

Under pressure

Mr Strauss-Kahn also warned that as financial markets and economies recover, there is a danger that political momentum for reform may vanish as leaders go back to concentrating on their own domestic problems.

“A lot of reform is needed,” he said. “We need strong political will to work out financial reforms. If we exit too early, we will have a new crisis.”

Overall, Mr Strauss-Kahn sees a huge ongoing transformation in Asia. While he sees less growth as a result of US consumers spending less, he noted how strong economies in Asia are helping millions of people escape poverty. “China, in particular, is relying less on an export economic model and more on a domestic one,” he said.

For that reason, he referred to 2008 as the year of humility, 2009 the year of unity to avoid another Great Depression, and 2010 as the year of transformation and balance of power between the East and West.

 

Sector growth

Going forward, finance ministers and economic representatives from countries across Asia expressed a belief that certain sectors will offer the biggest growth opportunities for economic development. Those were predominately in environmental technologies, infrastructure development and manufacturing.

Korn Chatikavanij, Thailand’s finance minister, emphasised the importance of public private partnerships and their need to co-exist with government. “We cannot rely solely on lending from banks,” he said.

Richard Sandor, chairman and founder of the US-based Chicago Climate Exchange, stressed how he believes China can become the pre-eminent market for trading carbon emissions.

Zhang Yue, chairman and chief executive of Broad Air Conditioning, commented how China represents a huge market for environmental technologies, but offers an equally large opportunity for changed attitudes in being conscientious. “Education is needed for a changed mindset,” he said.

Meanwhile, Jing Ulrich, managing director and chairman of JPMorgan’s Chinese equities and commodities business, said that huge infrastructure projects in China will be more open to private and foreign investors, and serve as a catalyst for China to develop more sophisticated financial instruments for both domestic and foreign investors.