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East Asia’s exports to developed economies have fallen – particularly to
the G3, including the U.S., EU, Japan – so has trade among countries
of the region.

Nor is the China likely to be the answer. China as a market is
shaped not by size or growth of its GDP, but by its capacity to
generate net demand for the import of final manufactures. In recent
years China has imported around 50% of all intra-regional intermediate
exports (parts, components). But this has been as inputs to final
exports to developed economies, e.g. for iPhones to the U.S. and the
EU. To become a growth locomotive for Asian manufactures China
would need to raise not only its domestic consumption as a share of
GDP, but also its imports of final goods from the region. China’s
economic rebalancing from investment- and export-driven, to
consumption- driven growth is uncertain; involving significant political
uncertainty, as noted; and likely to mean slower growth for an
extended period. Even if successful, this rebalancing will not
automatically translate into correspondingly increased manufactured
imports. China’s ambitious “One Belt, One Road (OBOR)” initiative
promises financing for regional (and global) infrastructure and
connectivity, but does little to address the challenge of generating much
needed global market demand.

Cross-border financial flows are also problematic, well below their
16
past peaks, and at a level comparable to that of the early 2000s. Net
capital inflows to emerging economies, including to East Asia, have
fallen quite significantly. This is not because there is no money around.
There are great pools of liquidity earning very low returns; while at the
same time there are massive needs in infrastructure finance. The rise of
U.S. interests rates will further impact on both exchange rates and the
debt profile of emerging economies, tightening financial conditions in
Southeast Asia.

16 International Monetary Fund, 2016. World Economic Outlook (WEO), April,
Washington, D.C.

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