Learning the ABCs of Asian economies at Harvard

At this year’s gathering, the cockiness and optimism about a rising China was far less apparent

The official theme of the most recent Harvard Asia Business Conference was “Uncertainty and Opportunity,” but I surmised that uncertainty was the more dominant theme this year.

This is not surprising given the general slowdown of emerging markets in 2013. What’s happening in China, whether North Korea would go over the deep end or the Japanese experiment in Abenomics was on everyone’s mind this time.

I attend the Harvard gathering regularly because we have enjoyed a healthy and successful exposure to emerging markets over the past few decades for our clients. I also have had a deep interest in the history and economic development in the region, since my uncle had the good fortune to strike one of the first business deals in Mao’s China in 1975. I still remember him talking about visiting China with the support of Nixon and Kissinger. My dad also consulted to Japan’s Mitsubishi in the early 1970s.

At this year’s gathering, I was struck that the cockiness and optimism about a rising China was far less apparent. One young Chinese entrepreneur even suggested to me that she might abandon her efforts to launch her health care venture in China in favor of the United States in 2014.

The swagger this year was more modest in part because Chinese economic growth has slowed from a rate of 12 percent to 8 percent. By any other measure, that would be almost extraordinary, but perhaps not for China, which needs more rapid economic growth to sustain its developing social fabric.

China is in a unique situation. It is a developing country dealing with many of the same problems found in the developed world, but without the wealth and policy framework with which to manage them. The recent meeting confirmed what New York Times columnist Tom Friedman said to me last fall: wealthy Chinese could not get their money out of China fast enough.

The meeting also underscored the region’s challenges with capital formation and flows, regulatory compliance and fraud. There is still an immense market for innovation in the region, but more venture capital funding is moving away from angel startups to later-stage development and a quick exit strategy. Venture investors typically manage risks just like the rest of us do.

Having a potential rug pulled from underneath the Chinese leadership is as significant a risk as the rapid and double-digit growth they have enjoyed since the early 1980s. How China and the rest of the emerging markets manage the environmental and social consequences of rapid growth could go a long way in structuring the overall health of the world economy for the rest of this century.

A slowing and challenged China will also delay what I believe will be the probable handoff from the dollar’s top spot as the international currency reserve. Whether it is two years or five years or the decade, the current reserve status quo that has been in place since the end of World War II will come to an end. The developing world is catching up fast and in ways no one could have foreseen at Bretton Woods in 1944.

Real strides

While China’s stature will always be the focus, its travails should not overshadow the real strides taken throughout other parts of East Asia. I first attended the Harvard Conference a few years after the Asian financial crisis of the late 1990s. While most Americans have forgotten or never took note of the crisis, this was no small event for the economies of these countries, for international markets and for investors. Because it was a currency contagion, which began with Thailand and spread quickly during a multi-month period, the crisis seemed to have no bottom at the time. It also provided the death blow for Long Term Capital Management, the Ph.D.-driven hedge fund that failed in the United States.

Countries such as Thailand, Vietnam and Malaysia recovered from the crisis well, in part because they saw the importance of a stronger regulatory framework.

It is worth noting that it was almost four decades ago when the Vietnam War ended in 1975 and that it took more than two decades after that for diplomatic relations to be restored. The first trade deal was completed in 2000, and by 2011 Vietnam was the 45th largest importer from the United States and the 26th largest exporter of goods. The point of this minor history lesson is to show that what was once inconceivable is now normal. It’s safe to assume that many of the stronger East Asian economies are taking the long view that can go missing throughout the developed world.

One other thing has not changed: the world continues to become more, not less interdependent. We were reminded again in 2011, from the Fukushima nuclear disaster and most recently with the deadly garment factory fire in Bangladesh, that what can seem like a largely local problem can grow quickly to have significant international impact.

Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000.