The current global financial crisis has led some to argue that in the final analysis, China and the US, as G2 are the key players in the recovery of the global economy. Although, China's banking and capital markets have not been directly affected by the current global financial crisis, China should be given more incentive for removing a number structural bottlenecks in banking, insurance, telecommunications and services sectors, as the US should be encouraged to rebalance her savings and consumption over a period of time.
Given the slow pace of progress in addressing the underlying causes of the trade imbalance between the US and China over an extended period of time, in addition to ongoing bilateral negotiations, Australia could facilitate and promote the dynamic benefits of regional economic and financial integration in Asia which could remove the structural bottlenecks in China's economy, including her exchange rate as well as rebalance the US savings and consumption. This has the potential to transform both the Asian and the US economies to a new level of cooperation and mutual benefit. At the present time, advanced economies such as Australia, China, Japan, Singapore, South Korea and New Zealand are the most qualified countries to start the process of financial integration in Asia. Other Asian countries could join these core countries, as their economic conditions qualify them for this membership. In other words, there could a two tier approach to the emergence of an Asia Pacific Community over time. As financial integration is a process and not an event, the actual process may well take some years. However, this process, coupled with the process of trade liberalisation within ASEAN and/or APEC will gradually transform the structural bottlenecks in China and other countries in Asia.
European financial integration showed that unlike earlier assumptions like the "optimum currency theory" in the 1960s, labour mobility is no longer an issue for regional financial integration, as capital mobility is the crucial ingredient in this process. Thus, Chinese workers do not need to have free access to labour markets in Japan or in Australia for the formation of financial integration in Asia.
Furthermore, one should recall that the process of economic and financial integration in Europe over the last 50 years removed fear and suspicion between old enemies such as Germany, France and the UK. Furthermore, the process also removed the suspicion of small nations in Europe who were fearful of German or British investment in their countries.
At the present time, Australia evaluates China's strong appetite for investment in her mining sector in the context of her national security, as Australia did for Japan in the past. However, if financial deregulation is taking place amongst the member countries of an Asian block, this implies that Australia and Japan will have access to banking, insurance and funds management sectors in China, as China increases her investment in mining and other sectors within the regional block. While the mining sector may be needed for the next twenty years in China, as China builds up her economy, the financial sector may well keep growing over future decades.
Since the Asian currency crisis, China has been building her foreign reserve almost as insurance against another Asian currency crisis or a global financial crisis. China has also promoted her domestic policies which encouraged more savings and less funds for small business. However, the process of regional integration could encourage China to invest more in Asia, as Germany did in Europe.
In Europe, investment by Germany and France in less developed parts of Europe such as Greece, Spain and Portugal in the 1980s and 1990s transformed the backward economies of these countries into more advanced economies that in turn assisted Germany and France to further prosper as their neighbours' fortunes improved.
The most effective process to get the best out of the G2 and make both better off, would be to work for a more prosperous and more integrated Asian economy. Regional economic and financial integration in Asia will increase investment from the US and the EU into Asia, as the process of financial integration would improve the living standards of 800 million middle income consumers in Asia.
The post global financial crisis era may create G3 ( US, the EU and Asia) with three key currencies that could provide more global financial stability, far greater free flows of international capital, more balanced international trade and less government debt.
Fariborz Moshirian is editor of the Journal of Banking and Finance and Professor of Finance at the Australian School of Business, UNSW.
A version of this opinion piece was published in the Financial Review on Monday 4 May, 2009.
AGSM Scholar, Professor, Director of the Institute of Global Finance
School of Banking & Finance