GT Voice: While US policy presents risks, SE.Asia should strengthen cooperation with the yuan

Photo: CI

As the United States begins a drastic tightening cycle by raising its benchmark interest rate, Southeast Asian countries seem to have once again faced a new wave of economic turmoil sweeping through their economies, their stock markets and currencies.

As of Monday’s close, Vietnam’s Ho Chi Minh stock index plunged nearly 20% in May, while the composite index of Indonesia’s Jakarta stock market fell more than 9%, the exchange rate of the Indonesian rupiah against the US dollar hovering around its April 2021 low. Other Southeast Asian markets have also performed poorly in recent days.

Although there is no major negative news about their economies in the market and not too long ago, Southeast Asian markets were considered a new promised land for investment global capital markets due to the rise of manufacturing in the region, investor appetite seems to have changed. dramatically.

One of the main reasons for the region’s negative outlook is the tightening of US monetary policy. In early May, the Federal Reserve raised interest rates by half a percentage point and announced that it would soon reduce its bond portfolio.

Since Southeast Asian countries have a large number of assets denominated in US dollars and use the dollar as their main currency of trade settlement, their economies are often unwittingly exploited by their overreliance on the dollar. This dependence may explain why, when the Fed begins to raise interest rates to extract liquidity from global markets, emerging economies in Southeast Asia are among the first to face capital outflows, economic turbulence economies, asset meltdowns and even financial crises.

There is therefore cause for concern whether Southeast Asian economies will face another impending crisis after the US Fed’s rate hikes, and a downward spiral could be exacerbated by the Russian-Russian conflict. Ukrainian, U.S.-led economic sanctions against Russia, and the ongoing COVID-19. pandemic.

One might get the impression that Washington is doing its best to restore relations with the ASEAN countries, but it does not understand that the problem is not only that it has not invested enough, but that its economic and financial policies often deviate from, or even harm, the development of these countries.

The so-called Special US-ASEAN Summit in Washington last week was a prime example of a US investment engagement aimed at undermining ASEAN cooperation with China. But the countries of the region know only too well that their development, including the management of the shocks created by American monetary policy, requires greater coordination.

One of the lessons of the 1997 Asian financial crisis was that countries in the region should not become subservient to the US economy. And the pivotal role that China played during this economic crisis has since become even more important in promoting regional cooperation.

The United States is sparing no effort to sabotage cooperation between Southeast Asia and China by sowing discontent, there is no way it can stop the massive economic ties between China and the United States. ASEAN. Over the years, China’s rapid development has given a strong impetus to the prosperity of Southeast Asia. China has become the biggest trading partner of almost all Southeast Asian countries, with their supply chain cooperation closely intertwined.

Additionally, heightened global financial risks will heighten the urgency for increased cooperation between the two sides. On the one hand, Southeast Asia must find ways to reduce or hedge the risks caused by its dependence on the dollar. On the other hand, given the strong links with the industrial chain, the potential economic turbulence in Southeast Asia will also have an impact on the Chinese economy.

In this sense, China should continue to promote the internationalization of the yuan in Southeast Asia, including increasing the use of the yuan in trade settlements and increasing the proportion of the yuan in global currency reserves. To that end, the IMF recently raised the weight of the Chinese yuan in the Special Drawing Rights (SDR) currency basket to 12.28% in its first regular review of the SDR’s valuation, in a major manifestation of growing global recognition of the Chinese currency.

As the yuan is used more in economic and trade cooperation between China and Southeast Asia, it is believed that the region’s ability to withstand financial risks posed by U.S. policy shifts will also be enhanced.

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