The next global crisis may finally start in Asia

Europe remains plunged into a deep crisis of multiple causes. On the one hand, the European Union (EU) is more and more rejected and the possibility of an exit of Britain – the “Brexit” – puts its very existence at stake. On the other hand, Europe’s macroeconomic conditions have improved and despite the lack of consensus on the Eurozone monetary policy, there still exist some common interests which make Europe a less volatile environment than Asia.

The two main Asian economic powers – China and Japan – have more common economic interests than their respective people think. However their political differences and historical rifts have prevented the two countries from designing a win-win policy over the long-term. On the monetary front, China has continued its competitive devaluation with a view to decreasing – around 3% so far over the last 12 months – the Yuan (CNY)’s value against the US dollar (USD).

As a result, Japan will likely take similar steps for the Yen (JPY) after its exports fell sharply by 10.1% year-on-year in April 2016. Beyond fear of negative consequences from an impending rate hike by the Fed, domestic politics could also be a major reason behind what could turn into the next global crisis. The Chinese government has made real efforts to structurally reform the way it deals with economic and business issues, however the risks of overextended shadow finance and the absence of an independent assessment of both Chinese debt and quality of Chinese companies’ results could become a nightmare in case the situation deteriorates suddenly.

Principally because of electoral reasons, the Japanese government has postponed its controversial 2-percentage-point sales tax hike, this way taking the high risk of depriving its whole economic effort of indispensable coherence. The lack of trust between China and Japan and flaws that result from their respective domestic politics environment made Cyceon think that the epicenter of the next global crisis could be well found in Asia.