The Bull Case for Asia: Unlocking Growth in a New Monetary Zone

1. Emergence of an Asian Monetary Zone

Asia is witnessing the development of a regional monetary zone, primarily centered around the Chinese renminbi (RMB). Key aspects of this shift include:

• Shift Away from the US Dollar: Central banks across Asia are increasingly aligning their exchange rates with the RMB, rather than the US dollar, leading to reduced volatility and better coordination between Asian economies. The Chinese central bank plays a critical role by stabilizing the RMB-USD exchange rate, which in turn stabilizes exchange rates across the region.
• Foreign Exchange Reserves: Over the past few decades, Asian countries have accumulated substantial foreign exchange reserves due to large current account surpluses. This process accelerated following the late 1990s Asian financial crisis, insulating these economies from future balance of payment crises. Moreover, recent geopolitical shifts, such as the war in Ukraine, have allowed Asian countries to buy oil and gas in their own currencies, further reducing the reliance on US dollars and diminishing the need for large Western currency reserves.

This change in foreign exchange dynamics leads to a decrease in purchases of Western bonds, which is expected to push real interest rates lower in Asia, while simultaneously increasing interest rates in the US and Europe. This shift sets the stage for a favorable economic environment in Asia.

2. The Bull Case for Asia