As China rises, Fed is US bulwark in Asia


Here’s a way of thinking about the contest between the US and China that doesn’t involve a Great Wall of Sand in the South China Sea or nuclear tensions on the Korean peninsula: The US Federal Reserve (Fed) and the dollar may be all that prevent China’s domination of Asia.

That might seem flippant, but I am convinced there’s something to it. US President Donald Trump is no longer at the centre of discussion about US retrenchment. Don’t get me wrong: Heads may shake in disappointment and resignation at his latest antics, but not in amazement.

During my recent two-week swing through Asia, the 45th president was maybe the third or fourth thing people wanted to talk about — sometimes, he didn’t even come up unless I raised him. That’s a huge change.

There’s a fading of influence, generally. Moreover, people in Asia don’t assume a post-Trump return to business-as-usual in 2021 or 2025.

It’s not that the US is fighting a losing battle for influence; more like America is a bit of an afterthought.

Who knows, regardless of the White House occupant, whether the US will be there for Asian allies and economic partners?

What we do know is that China is at home in Asia and, as the Australian National University’s Hugh White told Tobin Harshaw and me, US interests in the region will always be secondary to China’s.

China simply has more at stake in the neighbourhood.

Trump wasn’t the catalyst for this sentiment, though he did accentuate it. That America could elect Trump says something broader about larger forces at work in the country.

That’s what people in Asia are now thinking. The country is basically at war with itself. How can it protect and nourish others, economically or otherwise? The US is becoming an island, one American-educated investor with close ties to Beijing told me over coffee.

Yet around us, stocks in Asia and around the world were gyrating. The proximate causes were wild swings on Wall Street and fears that a pick-up in inflation was in the offing and would prompt the Fed to raise interest rates faster than projected.

It had nothing to do with China and nothing to do with Asia. American investors were having a moment and so, by default, was the rest of the world.

This is where one of the great contradictions comes in. For all China’s gravitational pull, the country’s capital markets are small, and foreign participation in them is even smaller.

That will change over time, but it hasn’t happened yet. Add to that a raft of Asian currencies that have hard or soft pegs to the dollar. Perhaps the world could use a less uni- polar financial order.

Outside markets — admittedly a big caveat — the economic arena increasingly looks like China’s.

Infrastructure gives an insight. Trump isn’t the only one looking to make his country great through roads and bridges.

Infrastructure is central to Indonesian President Joko Widodo’s economic plans, and Chinese investors are lining up to plough money into it.

Mainland China has muscled its way into the top five foreign investors in Indonesia along with Singapore, Japan, South Korea and Hong Kong.

In the world’s third-largest democracy — for decades a close US friend — potential American partners are mostly missing in action.

As I prepared to leave Asia, news broke that Trump wanted a parade to celebrate America’s military strength.

For a real demonstration of America’s remaining influence, tune in at the end of this month to Jay Powell’s first Congressional testimony. — Bloomberg

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