BANKING ON EAST ASIAN INTEGRATION?
IMPLICATIONS OF GLOBAL FINANCIAL CRISIS ON REGIONALISMBERNARD ONG1
Abstract
This paper examines the impact of the current global financial crisis, sparked off by
the collapse of the US banking sector last year, on integration efforts in East Asia.
Following the first wave of regionalism brought about by the Asian financial crisis of
1997-8, it reviews the effects of the current crisis on the pace of regionalism in East
Asia. Through the lens of a neorealist, this paper looks at how the present financial
upheaval has influenced foreign policy calculations and behaviors of countries inrelation to its impact on the momentum of East Asian regionalism. The central
argument is that the current global crisis, whose effects on the world economy issecond only to the Great Depression of the 1930s, will not be a catalyst to theintegration process in the region. The conditions leading to the first rush of East
Asia regionalism after the Asian financial crisis are not present in the current crisis.
Rather than a second wave of regionalism as seen in the decade following theevents of 1997-8, bilateralism is likely to take precedence over regionalism as East
Asian countries’ preferred modus operandi in responding to the accelerated rise of
China precipitated by the present crisis.
Section I: Introduction
The current financial upheaval, which started with the collapse of the United States(US) banking sector in September 2008, has a deep impact on the global financial
system. Economies across the world experienced severe strains to their banking
industries causing some governments to nationalize their banks and put in place
1

This paper is prepared for the Summer Institute on Asian Regional Integration, 3-8 August 2009,
organized by the Global Institute for Asian Regional Integration (GIARI) under the Waseda
University Global COE Program. The author would like to thank GIARI for the opportunity topresent his findings and participate in the Summer Institute.

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stimulus packages to reinvigorate their domestic markets. In a recent article toForbes Asia, Singapore Minister Mentor Lee Kuan Yew shared his views that East
Asian countries were the hardest hit in the current world crisis.2 Former US Deputy
Treasury Secretary Roger Altman wrote in Foreign Affairs that “the financial andeconomic crash of 2009, the worst in over 75 years, is a major geopolitical setback
for the United States and Europe”. 3 What started as a US banking problem hasturned into a global crisis affecting all countries. Governments across the worldfrom Asia-Pacific to Europe scrambled to assure markets that their banking
structures were sound and not in danger of bankruptcies.
To deal with the unprecedented crash of the global financial system, somecountries resorted to using what are perceived as anti-free trade instruments toprotect and spur their domestic industries. Their actions appear to vindicate thecommon retort that economic crises impede regional integration due to thetendency of member countries to apply unilateral protectionist measures.

US

President Barack Obama, for example, had pushed for a “Buy American” clause in
his economic stimulus package which required new infrastructure projects to use
American-made manufactured materials. 4

While the clause was eventuallysoftened with a provision that constrained procurements to be aligned with US’international trade obligations, several US cities and states were not bound by therules of the World Trade Organization (WTO) and North American Free Trade
Agreement (NAFTA). 5 At the time of writing this paper, Canada has issued astatement promising retaliatory actions if the US does not withdraw theprotectionist article. In another tit-for-tat response, Beijing also announced a “BuyChina” policy in June 2009, mandating its government procurement to use only
Chinese products or services unless they were not available within the country.6 In
an exclusive interview with China Daily on 15 July 2009 during an official visit to2

Forbes Asia, “East Asians Hardest Hit in World Crisis” (8 June 2009).
Roger C. Altman, “The Great Crash, 2009: A Geopolitical Setback for the West”, Foreign Affairs,Vol. 88, Iss. (January/February 2009), 2-5.
4Wall Street Journal, “Obama Risks Flap on ‘Buy American’” (4 February 2009).
5
New York Times, “The Peril of ‘Buy American’” (3 June 2009).
6
Financial Times, “‘Buy China’ Policy Set to Raise Tensions” (15 June 2009).
3

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Beijing, US Commerce Secretary Gary Locke conceded that it would be difficult tofind “the right balance between free trade and protecting domestic companies,
especially in tough economic times”.7 These two episodes illustrate how even theworld’s superpower and rising power had to turn their backs to the ethos of free
trade in the face of a major economic downturn.
In Southeast Asia, some analysts have begun to cast doubts on the Association ofSoutheast Asian Nations’ (ASEAN) plan to create an ASEAN Economic
Community (AEC) by 2015, which in better times, were already seen as anambitious target to achieve. 8 A case in point is Indonesia’s push for a “BuyIndonesia” programme which directs its civil servants to purchase only locally madeproducts.9 Malaysian Prime Minister (PM) Najib Razak also announced at a minibudget in March 2009 a doubling of the country’s foreign worker levy to encourage
the hiring of locals.10 Such protectionist measures have led ASEAN SecretaryGeneral Surin Pitsuwan to caution that protectionism will harm ASEAN’s integrated
market plan.11 Pitsuwan’s sentiment is echoed by Asian Development Bank (ADB)
President Haruhiko Kuroda who acknowledged at a public lecture in Singapore on
22 June 2009 that we were “faced with the rise of protectionism in Asia-Pacific andall over the world”.12 It should be highlighted here that the revival of protectionism
cuts across both developing, as well as developed countries. In April 2009, WorldBank (WB) President Robert Zoellick revealed that nine of the Group of 20 (G-20)
nations were considering or had taken measures to restrict trade in the face of thecurrent economic downturn. 13 WTO Director-General (DG) Pascal Lamy also
acknowledged at a General Council meeting in May 2009 that the global trading
system would face added political strain as the economic crisis heightened

7

China Daily, “Let’s Get the Balance Right, Says Locke” (16 July 2009).
The Business Times, “Crisis Will Spur ASEAN Economic Integration” (24 February 2009).
9
The Jakarta Globe, “New Idea to Boost Economy” (27 February 2009).
10
The Star, “HR Minister Wants Doubling of Foreign Worker Levy Delayed” (25 March 2009).
11
The Jakarta Post, “Global Crisis a Hurdle to Economic Integration” (27 February 2009).
12
Haruhiko Kuroda’s reply during the Question & Answer Session, Public Lecture organized by theInstitute of Southeast Asian Studies on “Asia’s Recovery from the Global Financial Crisis – What it
Takes and What Could ADB do?” in Singapore (22 June 2009).
13
The Straits Times, “World Bank Leader Warns G-20 Not to Restrict Trade” (25 April 2009).
8

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protectionist pressures.14
The evidence suggests a creeping disposition among members of both regional
and international organizations to embark on unilateral solutions, which are
detriment to regional cooperation and integration efforts, in the present crisis. This
paper aims to address the pertinent theme: Will the current global financial crisis
present an opportunity or impediment towards East Asian regionalism?
Section II begins the discussion by taking stock of current literature on the effects
of global crises on geopolitical and economic interactions. With the benefit ofhindsight, the analysis looks into the implications of the Asian financial crisis of
1997-8 on the progress of East Asia regionalism.

The findings show a broadconsensus that the Asian financial crisis has hastened the pace of regionalism inEast Asia with a slant towards ASEAN-centric regional forums.
Section III proposes a theoretical framework to examine the implications of thecurrent crisis on regional cooperation in East Asia. It highlights the dearth of asystem-level theory to appraise the impact of global crises on regionalism before
surveying the effects of the current financial turmoil on regional cooperation
through the lens of a neo-realist. The main thrust of the discussion is that global
crises could narrow the disparity of capabilities among countries, and hasten therise of new powers.

The accelerated change in the distribution of capabilities

among countries will influence a state’s foreign policy calculations, including its
decision on the forms of regional cooperation to take.
Section IV accounts for the shifting distribution of capabilities in the present crisis
between the US and China.

It addresses the pertinent question of how thisdefining event will impact on East Asian integration. The results suggest that thecrisis has hurt the Americans more than the Chinese, and that current efforts by
14

The Business Times, “More in WTO Support an Early Doha Deal to Tackle Protectionism” (28May 2009).

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China to reduce its reliance on the US could be seen in the wider context of a more
assertive China with greater foreign policy options. The section then highlights
how the rest of East Asia, as secondary states, have responded to the accelerated
rise of China, and how this would impact on the destiny of East Asian regionalism
in the next decade.
This paper is primarily focused on studying the impact of the present global crisison the integration of East Asia.

Historically, developments of a worldwide

consequence such as the 9-11 terror attacks have the ability to reshape theinternational geopolitical and economic landscape.

Pollack makes a moredefinitive assertion that future regional strategic patterns will be driven by events.15
In the words of Jayasuriya, economic crises unsettle prevailing entrenchedinterests and regional arrangements while providing opportunities for new reformist
coalitions to form.16 The findings of this paper suggest that the present crisis will
not lead to a second wave of regionalism in East Asia as seen during the Asianfinancial crisis.
Section II: Literature Review
Notwithstanding the conspicuous shift towards protectionism in the current crisis as
highlighted in Section I, there is another school of thought which purports that
economic catastrophes could hasten regional cooperation. A 2007 Organization
for Economic Cooperation and Development (OECD) report indicated that the
Asian financial crisis of 1997-8 had acted as a trigger for enhanced financial
cooperation in Asia, especially in the area of finance and Foreign Direct Investment(FDI). 17

The underlying assumption isthat countries understand theinterdependence of their economies and that survival depends on their willingness
15

Jonathan D. Pollack, “The Asian Security Order” in David Shambaugh, ed., Power Shift: China
and Asia’s New Dynamics (California: University of California Press, 2005), 342-3.
16
Kanishka Jayasuriya, “Introduction: The Vicissitudes of Asian Regional Governance” in Kanishka
Jayasuriya, ed., Asian Regional Governance: Crisis and Change (Abingdon, Oxon: Routledge,2008), 3.
17OECD Report, “Fostering Regional Integration: Peer Review in Southeast Asia” (May 2007), 3.

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to work as a regional grouping to overcome the economic downturn. This group ofscholars maintains that crises play a “catalytic role in developing a sense ofcommon identity, particularly in the image of a region in adversity besieged byoutsiders”.18 In support of their case, they explain that the economic upheaval of
1997-8 has propelled ASEAN countries’ pursuit for solutions to reduce the effectsof the financial disruption, as well as their subsequent alignments with China,
Japan and South Korea through the ASEAN Plus Three platform. 19 The mostimportant outcome and often cited achievement of the region in the post-crisis
period was the creation of the Chiang Mai Initiative (CMI) announced by thefinance ministers of ASEAN Plus Three in May 2000. The Asian financial crisis
was also seen as a stimulus which kick-started regional discussion on the ASEAN
Bond Market Initiative (ABMI) and Asian Currency Unit (ACU), among others.
In addition to the concerted accomplishments by the region at the institutional level,
there was also a noticeable spike in the number of Free Trade Agreements (FTAs)
established in the post-crisis period.

Urata, for example, points to the active

formation of Regional Trade Agreements (RTAs) among Asian countries since theearly-2000s, and concludes that the Asian financial crisis has led to an awarenessof the need for regional cooperation such as a region-wide FTA to avoid anothercrisis and to promote economic growth. 20 Several analysts were also quick tohighlight that the proliferation of RTAs during the post-crisis period was significant
given that China, Japan and South Korea were not a party to an FTA up to the1990s. 21 By contrast, China expedited the negotiation and conclusion of theASEAN-China FTA shortly after the Asian financial crisis, which was to be followed

18

Hidetaka Yoshimatsu, The Political Economy of Regionalism in East Asia: Integrative Explanation
for Dynamics and Challenges (New York: Palgrave Macmillian, 2008), 16.
19
Yoshihiro Otsuji and Kunihiko Shinoda, “Evolution of Institutions and Policies for Economic
Integration in East Asia: History and Prospects” in Masahisa Fujita, Satoru Kumagai and Koji
Nishikimi, eds., Economic Integration in East Asia: Perspectives from Spatial and NeoclassicalEconomics (Cheltenham: Edward Elgar Publishing Limited, 2008), 112.
20
Shujiro Urata, “Institutionalization of Regional Economic Integration in East Asia”, GIARI Working
Paper (December 2008), 22.
21
Motoshige Itoh, “The Integration Process in East Asia: Japan’s Experience and Policy Agenda” inDuck-Koo Chung and Barry Eichengreen, eds., Fostering Monetary & Financial Cooperation in East
Asia (Singapore: World Scientific Publishing, 2009), 147.

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by the ASEAN-Japan and ASEAN-Korea FTAs.
A mention should be made here about China and Japan’s considerations in theformation of the ASEAN Plus Three grouping. China’s unequivocal support of an
East Asian institution in the post-crisis period was expected given its interest to
further enhance its prestige in the region after its initial loan offers to crisis-affected
countries and resistance to devalue the yuan. Chinese assistance was seen as“free coals in cold weather” and heightened its influence in East Asia.22 On theother hand, Japan’s decision was less straightforward because it had notsupported Malaysia’s suggestion for an East Asian Economic Caucus (EAEC)
which excluded Japan’s staunchest ally, the US, in 1992.

Terada attributes

Japan’s policy shift to its realization that a consensus had developed that the time
was ripe to create East Asian regionalism to tackle regional problems, and thatcritically the US was not opposed to the ASEAN Plus Three institution.23
More significantly, observers like Dittmer underline that the events of 1997-8 have
led to a shift in the focus of regional cooperation from wider Pacific Rim
organizations such as the Asia-Pacific Economic Cooperation (APEC) to all Asian
forums comprising the ASEAN Plus groupings and bilateral FTAs.24 That ASEAN
countries have moved closer to their Northeast Asian counterparts, especially with
China was, in part, due to US’ poor leadership during the financial meltdown. US’nonchalant response led to a widespread perception that the country could not be
depended on during a crisis. There was a strong resentment among some East
Asian countries against the “Washington Consensus” of rapid deregulation andprivatization, which underpinned the International Monetary Fund (IMF) policy
prescriptions for crisis-affected countries. 25

The conditions associated to the22Long Guoqiang, “China’s Policy of Opening Up in the Decade After the Asian Financial Crisis” inWang Mengkui, ed., China in the Wake of Asia’s Financial Crisis (Oxon: Abingdon, Routledge,2009), 70.
23
Takashi Terada, “Japan and the Evolution of Asian Regionalism”, GIARI Working Paper(December 2007), 17.
24
Lowell Dittmer, “The Asian Financial Crisis and the Asian Development State”, Asian Survey, Vol.
47, Iss. 6 (Berkeley: University of California Press, 2007), 830-3.
25
Yoshimatsu, Japan and East Asia in Transition, 140.

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financial rescue packages laid down by the US-backed IMF were deemed to be too
severe, especially in Indonesia. Furthermore, US’ veto of Japan’s proposal for an
Asian Monetary Fund (AMF) on grounds that it would undermine IMF’s efforts andallow wayward governments to postpone reforms was interpreted as an attempt by
the US to maintain its hegemony in Asia. The lesson for East Asian countries wasthat they could not count on outside assistance during a crisis.
The current body of literature reflects a general consensus that the economic
collapse of several East Asian economies during the crisis of 1997-8 paved theway for regional cooperation. The study also suggests that the region has resorted
to self-help in the absence of a strong leadership from the US. The post-crisis
period also witnessed ASEAN becoming the centerpiece of an accelerated East
Asian regionalism through the ASEAN Plus Three framework.

East Asian

countries have come to the realization that regional cooperation insulates themfrom global shocks and reduces their economic dependency on the US, as well as
Europe.
Turning to the current crisis, a few emerging studies suggest that the ongoing
financial turmoil has reshaped the international financial and economic order.
Henning, for example, argues that the US banking catastrophe presents anopportunity for Asia to bolster financial cooperation by enhancing regional
surveillance and policy dialogue. 26

Among the first initiatives proposed, ADB

President Kuroda mooted the idea of an Asian Financial Stability Dialogue (AFSD)
to strengthen regional ties among finance ministers, central bankers and othersupervisory agencies.27 The AFSD will enable Asian governments to develop acoordinated plan of action to monitor potential vulnerabilities and internalize
regional spillovers. In addition, an Economist report highlights that China is using

26

C. Randall Henning, “US Financial Crisis, Spillover to Asia and Opportunities for Asiannd
Regionalism”, paper presented to the 22 Asia Pacific Roundtable in Kuala Lumpur, Malaysia (3-5June 2008), 1-10.
27Haruhiko Kuroda, “High-Level Conference on Financial Crisis, Global Economic Governance, andDevelopment”, Keynote Address in New Delhi, India (6 February 2009).

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the current financial upheaval to boost its strategic influence in Asia.28 At the timeof writing this paper, available analyses on the present crisis thus far have tended
to focus on the causes of the US banking crisis and how it has led to the current
global financial meltdown rather than looking at how such external shocks could
influence states’ foreign policy considerations on regional cooperation, which iswhat this paper has set out to achieve. The remaining discussion therefore aims toaddress the following question: In light of the present worldwide economic crunch,
will East Asia experience a second wave of regionalism in the next decade as seen
after the Asian financial crisis?
Section III: Theoretical Framework
Current research on global crises offers few theoretical explanations on how acatastrophic economic event can influence the momentum of regionalism in East
Asia. Calder proposes a critical juncture framework to account for how the Asianfinancial crisis has called into question the existing geopolitical arrangement, andled to an urgent stimulus for change among East Asian countries. 29

Criticaljunctures, as defined by Calder, are historical decision points at which there areclear alternative paths to the future. 30

Broadly summarized, crises galvanize

national governments in taking steps to forge closer economic cooperation.
On the other hand, Beeson describes the post-crisis collaborative phenomenon as“reactionary regionalism”, which is defined as the direct result of regional initiatives
designed to mediate and moderate external influences, in particular the US’
policies in East Asia. 31 According to Beeson, a key motivating factor was thepossibility that regional institutions might have the potential to provide collective
28

The Economist, “A Time for Muscle-Flexing” (19 March 2009).
Kent E. Calder, “Critical Junctures and Northeast Asian Regionalism”, in Kent E. Calder andFrancis Fukuyama, eds., East Asian Multilateralism: Prospects for Regional Stability (Baltimore:
John Hopkins University Press, 2008), 16-25.
30
Ibid.
31
Mark Beeson, “ASEAN Plus Three and the Rise of Reactionary Regionalism”, Contemporary
Southeast Asia, Vol. 24, No.2 (Singapore: Institute of Southeast Asian Studies, August 2003), 25168.
29

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regional responses to external challenges.32 This framework is similar to Wade’s
assertion that post-crisis policy responses could only be understood by examining
the role played by the US as the world’s leading international financial actor.33 The
US has been instrumental in inducing East Asian governments to undertake rapid
financial opening and liberalization without which market integration in the region
would not have been possible. 34 Wade’s proposition is corroborated by Ito’s
second-level research on the behaviors of firms in the post-Asian financial crisis
period.

Ito’s findings suggest that market-led integration of production andinvestment was responsible for the process of East Asian regionalism.35 Diverse
economic conditions in terms of wages and technology in the post-crisis period
made it possible for firms in East Asia to enjoy the advantages of an extensive
cross-border division of labor, which in turn motivated firms to lobby governments
to seek lower trade barriers.

Urata also characterizes the nature of regional

economic integration in this region as market-driven rather than institution-driven
regionalization by explaining that it is trade and FDI liberalization policies, which
prompted integration in East Asia rather than the formation of RTAs.36 This view isshared by Otsuji and Shinoda who contend that regionalism in East Asia is driven
largely by market forces in the form of substantial FDIs by the Chinese, Koreans
and Japanese, as opposed to political will.37
What could be inferred from Beeson and Wade’s hypothesis is that East Asian
regionalism during the post-crisis period was made possible only because ofpressures applied by the US and its financial intermediaries such as the IMF and
WB. On balance, however, critical junctures and reactionary regionalism could not
explain why RTAs and ASEAN Plus Three took the center stage of East Asian
32

Mark Beeson, Regionalism & Globalization in East Asia: Politics, Security and Economic
Development (New York: Palgrave Macmillan, 2007), 12.
33
Robert Wade, “The US Role in the Long Asian Crisis of 1990-2000” in Arvid John Lukauskas andFrancisco L. Rivera-Batiz, eds., The Political Economy of the East Asian Crisis and its Aftermath(Massachusetts: Edward Elgar Publishing Limited, 2001), 196-7.
34
Ibid., 221.
35
Itoh, “The Integration Process in East Asia: Japan’s Experience and Policy Agenda”, 153.
36
Urata, “Institutionalization of Regional Economic Integration in East Asia”, 2.
37
Otsuji and Shinoda, “Evolution of Institutions and Policies for Economic Integration in East Asia:
History and Prospects”, 108.

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regionalism over other forums in the aftermath of the Asian financial crisis. The
current body of literature on crises does not adequately explain how an economic
catastrophe influences the degree of interaction among states and why they turntowards or away from cooperation in times of crisis. Will the decade following thecurrent crisis lead to a second wave of East Asian regionalism as it did after the
Asian crisis of 1997-8?

If so, will the post-crisis architecture of East Asian

cooperation follow that of the post-Asian financial crisis, viz., favoring andaccelerating the ASEAN Plus Three cooperation, in particular the ASEAN-China
relationship, over other forums such as APEC?
The theoretical basis of this paper is founded on Waltz’s neo-realist interpretationof international relations.

Using a system theory, Waltz defines international

politics as a structure comprising of units with three characteristics, namely, (i) an
ordering principle which is anarchy (all states are equal); (ii) each unit performs
similar functions; and (iii) changes in distribution of capabilities across units affectthe structure of the system.38 Waltz’s theory needs no introduction here, except abrief elaboration on the third principle, which forms the thrust of this paper.
According to Waltz, “the structure of a system changes with changes in the
distribution of capabilities across the system’s units. And changes in structure
affect expectations about how the units of the system will behave and about theoutcomes their interactions will produce.”39
This paper argues that global crises such as the current global financial turmoil
have the capacity to reorganize the distribution of capabilities among states, inparticular those of the US vis-à-vis China. The change of distribution of capabilities,
whether perceived or actual, will affect foreign policy calculations of secondary
states, which will in turn influence their behaviors and interactions. That China is arising power which will challenge the US’ supremacy is not a new observation, but
the key theme here is that global crises have the ability to expedite the rise of a38

Kenneth Waltz, Theory of International Politics (Reading, Massachusetts: Addison-Wesley, 1979),
101-2.
39
Ibid., 97.

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superpower-to-be. The hastened structural change at the system-level will affect
how East Asian countries behave and interact with one another.
This hypothesis, if true, will lead to two observable state behaviors. First, rising
powers will seize the opportunity of a global crisis to reduce their dependency on
the superpower in an attempt to move away from a unipolar world.

Second,secondary states will exploit these external shocks to maximize their interests as
Waltz argues “secondary states, if they are free to choose, flock to the weaker side;for it is the stronger side that threatens them”.40
At first glance, it would seem counter-intuitive to suggest that Waltz’s theory ofinternational relations offers an explanation to the pace of regionalism in East Asia
in the present crisis, and to apply a political framework to an economic event.
However, this paper takes a strong assumption that economic might equates topower as many scholars have likewise purported. Ikenberry, for example, notesthat state power today is ultimately based on sustained economic growth. Cox also
asserts that the economy is the foundation stone of all viable empires.41 While the
US could wage wars in Middle East without the endorsement of the United Nations(UN) following the 9-11 attacks in the security realm given its military might, its
economy was too intertwined with the rest of the world, especially China, for theAmericans to undertake any unilateral economic actions.
concludes thatUS’

policyoptions

are

Moore therefore

increasingly constrainedby theinterdependence of its ties to East Asia, especially in economic affairs.42 Section
IV illustrates the drifting capabilities of US vis-à-vis China and suggests that thelatter has taken bolder steps to move away from a unipolar world.

It thenaddresses the pertinent question of how the rest of East Asia has responded to amore assertive China in the present crisis in relation to the likelihood of a second
wave of East Asian regionalism.
40

Ibid., 127.
Michael Cox, “Is the United States in Decline – Again?”, International Affairs, Vol. 83, Iss. 4(2007), 651.
42
Thomas G. Moore, “The Changing Face of American Power” in Nicholas Thomas, ed.,Governance and Regionalism in Asia (Abingdon, Oxon: Routledge, 2009), 215-6.
41

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Section IV: Accelerated Shift in Distribution of Capabilities
The late-Chinese leader, Deng Xiaoping, said in the early-1990s that China should“hide its capabilities and bide its time”. 43 This section describes how the US
banking crisis has reconfigured the calculations of East Asian countries on thecapabilities of the West, especially the US vis-à-vis China. It maintains that while
China has been hurt by the present crisis, its economic and financial power has
been strengthened relative to those of the West, in particular the US. No longer
content with hiding its capabilities in the present crisis, China has assumed a more
assertive posture in its dealings with the US and the wider East Asian region.
The crisis hurts the US much more than China
The US banking crisis has been described as “the most destructive 30 years offinance in world history”.44 The IMF attributed US$2.7 of the US$4.1 trillion global
losses in this crisis to the US.45 Countries which depended on exporting to the US
market were the most affected. For instance, the Wall Street Journal reported thatthe economies of the three largest trading partners of the US, namely, Japan,
Germany and Mexico, plummeted since the onset of the global recession.46 At themacro-level, the WB highlighted that the OECD economies, which accounted for 71
percent of the world’s Gross Domestic Product (GDP) in 2007, had shrunk by 4.2
percent in the first quarter of 2009 from a year earlier. 47 The US and Japan alone
contributed to 0.9 and 1 percent of that decline respectively. By contrast, the WB
raised the GDP forecast for China from 6.6 to 7.2 percent in 2009, and expected
the Chinese economy to grow 7.7 percent in 2010. 48 When asked for their
43

Bloomberg, “China’s Deng Dictum on Korea-to-Climate Dangers Imperiling G20” (20 April 2009).
The Japan Times, “Subprime Crisis Was Unleashed by Bank-shielding Policymakers” (25 May
2009).
45
The Financial Times, “IMF Put Financial Losses at $4,1000 billion” (21 April 2009).
46
Wall Street Journal, “World Economies Plummet” (21 May 2009).
47
International Herald Tribune, “Leading Economies Report a Period of Record Decline” (25 May
2009).
48
Financial Times, “World Bank Raises China GDP Forecast” (18 June 2009).
44

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estimates of China’s GDP in 2009 at an interview with McKinsey & Company in
May 2009, four leading Chinese economists projected the Chinese economy asgrowing within the range of 7 to 9 percent in 2009, representing only a slightdecline from its average of 9.7 to 9.8 percent in the past 30 years.49 True to theirforecasts, official data released by the PRC National Bureau of Statistic on 16 July2009 confirmed that the Chinese economy grew 7.9 percent in the second quarterof 2009, which sets the country on target to achieve at least an 8 percent GDP
growth for the year.50 The impressive comeback posted by China less than a year
into the crisis drew a prompt admission by a Merrill Lynch economist that “China’s
recovery is real, strong and sustainable”.51 Summing up the impact of the banking
crisis, Nobel Prize-winning economist Paul Krugman said that the US “risks aJapan-style lost decade of growth”.52 With the US dollar in steep decline and the
US financial system in crisis, most economists agree that US’ financial prowess will
wane over time.
At the micro-level, US multinational companies, which at one time were considered
prospective challengers to usurp the traditional role of the state, such as American
International Group (AIG), Lehman Brothers, General Motors (GM) and the likes,
collapsed one after another like a deck of cards. The implication and reputational
damage to the US cannot be understated. Bank of America (BoA), for example,
was forced to sell its stake of China Construction Bank (CCB) in January 2008 andagain in May 2009 to boost its own capitalization, a move which reduced its holdingof the prominent Chinese bank from 30 to 11 percent.53 Likewise, Citigroup had tosell off its holdings of Nikko, Japan’s top three securities groups, less than three
years after gaining a foothold in the Japanese market.54 In a ranking of the world’s
best banks, the Economist assesses that the Chinese banks now dominate the49

McKinsey Global Institute, “Is China Recession Proof”, The McKinsey Quarterly (May 2009).
China Daily, “China’s GDP Grows at 7.9% in Q2” (16 July 2009).
51
The Straits Times, “Domestic Demand Offsets Fall in Exports” (17 July 2009).
52
Reuters, “US Risks ‘Lost Decade’ Due to Half-Steps: Krugman” (11 May 2009).
53
Xinhua, “China Construction Bank Downplays Bank of America Sale” (14 May 2009).
54
The Japan Times, “Now Nikko Citigroup To Be Sold” (14 April 2009).
50

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standing by market capitalization. 55 Outside of the finance sector, a July 2009
Fortune report also named 43 Chinese companies in its list of the world’s 500
largest companies for the first time, registering a sharp increase from only 8
Chinese companies a decade ago.56 While there were still 140 US companies on
the list, 2008 marked the worst year in the history for US’ largest companies with
Wal-Mart also displaced from its pole position by a non-US company for the firsttime. Furthermore, as the list was based on the operating revenue of companies in
2008, it is expected that the ranking next year will show a further weakening of the
US’ economic prowess when the full force of the crisis on the US’ companies in2009 is factored in. A Bloomberg report in July 2009 affirmed that the Chinese
stock market might surpass the US’ as the world’s largest by value within three
years.57
Both the micro and macro examples reinforce the point that the current financial
turmoil has a disproportionate impact on the capabilities of the US vis-à-vis China.
China is well-placed to ride out the crisis, which has, in turn, expanded its foreign
policy options. By contrast, the economic and ensuing reputational damage to theUS, as well as the collapse of its once powerful commerical enterprises are not tobe taken lightly.

McKinsey & Company surmises that US’ role in the world

economy, and its leadership of capitalism and democracy, as well as moral
authority, have been severely weakened.58 The US itself recognizes its dwindled
position relative to the Chinese, and the shifting distribution of their capabilities in
the current crisis. During an official visit to Beijing in June 2009, US Treasury
Secretary Timothy Geithner conceded that “China is playing a very importantstabilizing role in the international financial system”.59 But how exactly have theChinese responded to their accentuated dominance?

55

The Economist, “The World’s Best Bank: A Short List” (23 May 2009).
Xinhua, “43 Chinese Companies Join the Ranks of the Fortune 500” (10 July 2009).
57
Bloomberg, “China ‘to Overtake Wall Street in 3 Years’” (18 July 2009).
58
Allen P. Webb, “Weighing the US Government’s Response to the Crisis: A Dialogue” The
McKinsey Quarterly (June 2009).
59
Wall Street Journal, “Geithner Says Beijing Has Confidence in US” (3 June 2009).
56

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China is seizing the opportunity to reduce its reliance on the US
According to Waltz, a change in the distribution of capabilities across the system’sunits changes the structure of the system. As the international structure alters, sodoes the extent of interdependence.”60 If Waltz’s hypothesis holds true, we willobserve China attempting to break away from the status quo by seeking measures
to reduce its dependence on the US and exert greater international influence.
Waltz considers two or more countries as “interdependent if the costs of breaking
their relations or of reducing their exchanges are about equal for each of them.”61
This definition aptly describes the current state of US-China relationship.

The

Chinese State Administration of Foreign Exchange (SAFE), which is responsiblefor investing China’s US$2.13 trillion in currency reserves (as of 15 July 2009),
conceded that the financial crisis had “struck a heavy blow to the internationalprestige of the dollar”.62 Unfortunately for China, approximately 70 percent of its
reserves are held in US dollar-dominated assets.63 The Chinese are in a Catch-22
situation because selling away the US-dominated assets will further depress theiroverall market value and hurt the Chinese even more.

In a revelation of theChinese growing concern with the security of its US assets, PM Wen Jiabao
conceded that the Chinese had lent a massive amount of capital to the US andcalled on the US to guarantee the safety of China’s assets.64 The sudden flurry ofChinese anxieties following the onset of the US banking crisis compelled Secretary
Geithner to give the assurance that “Chinese assets [in US dollar-denominatedinvestments] are very safe” in an address to Peking University.65
Yet the Chinese have taken steps in the last few months to reduce its reliance on
the US dollar. According to Yu Yongding, Head of Chinese Academy of Social
60

Kenneth Waltz, Theory of International Politics, 144.
Ibid., 143.
62
The Business Times, “Geithner to Reassure China Over its US Debt Investments” (29 May 2009).
63
The Business Times, “Where Did All the Yuan Go?” (29 May 2009).
64
New York Times, “China’s Leader Says He is ‘Worried’ Over US Treasuries” (13 March 2009).
65
Reuters, “Geithner Tells China Its Dollar Assets Are Safe” (1 June 2009).
61

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Sciences International Economics and Politics Research Centre, China has done
this in three ways, namely, stimulating domestic demand, diversifying funds from
US dollar-dominated assets and making sensible adjustments to the structure of its
US dollar-denominated debt.66 The Chinese government has unveiled a 4 trillion
yuan or US$586 billion package to stimulate the domestic economy, in addition to
currency swaps with various countries amounting to US$95 billion which will enable
its exports to be settled in yuan. In April 2009, the Chinese State Council alsoannounced that the yuan could be used in overseas trade settlement in five
Chinese cities following a trial run with Hong Kong, Macau and ASEAN in
December 2008.67 After the first successful completion of cross-border trade deals
amounting to 14.38 million yuan by three Shanghai companies in July 2009, many
companies in Singapore, Indonesia and Malaysia have shown great interest to
switch to using the yuan in their trade.68 These post-crisis measures were clearly
aimed at reducing the Chinese reliance on the US dollar as its trading currency.
Furthermore, China had been vocal in making a strong pitch for theinternationalization of the yuan in the past six months. Pushing for the replacementof the US dollar as the world reserve currency is a significant proposition by the
Chinese. Traditionally, empires that hold the global reserve currency are also net
foreign creditors and net lenders.69 In a press release issued by Bank of China(BoC) in March 2009, Governor Zhou Xiaochuan attributed the outbreak of thecrisis and its spillover to the entire world to the “inherent vulnerabilities andsystemic risks in the existing international money system”. 70 Zhou was referring to
China’s dependence on the US dollar as the world reserve currency. Calling forreforms to the international monetary system, he further proposed for a supersovereign reserve currency to reduce the risks of a future crisis and enhance crisis
management capability.71
66

The Business Times, “Where Did All the Yuan Go?” (29 May 2009).
China Daily, “New Move Takes Yuan Closer to Global Status” (20 April 2009).
68
China Daily, “Yuan Trade Pilot Scheme Kicked Off” (7 July 2009).
69
New York Times, “The Almighty Renminbi?” (13 May 2009).
70
Xinhua, “Reform the International Monetary System” (26 March 2009).
71
Ibid.
67

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It should be mentioned here that many experts agree that it will take a long time forthe yuan to be used as a global benchmark, especially since it is difficult to buy andsell yuan outside of the country. China recognizes this and is realistic about its
ability to reduce its reliance on the US dollar in the near term. Shortly after PM
Wen and Governor Zhou’s comments on the stability of the US dollar, the PRC
Ministry of Foreign Affairs reiterated that “the US dollar is still the most importantand major reserve currency of the day” and that “the situation will continue many
years to come”.72 In a speech made on behalf of Chinese President Hu Jintao to
the Group of Eight (G-8) in Italy on 9 July 2009, State Councilor Dai Bingguopressed for reforms to the global financial system and urged members to maintainthe stability of major international reserve currencies, but stopped short of calling
for the replacement of the US dollar. 73 Evidently, the Chinese government isavoiding a head-on collision with the Obama Administration, but their overtures, asseen through the flexing of their economic muscles and heightened lobbying ofgovernments in the present crisis, reflect a more assertive China setting the stage
for a greater role in world politics. This issue is likely to be raised again at theinaugural US-China Strategic and Economic Dialogue when Secretary of State
Hillary Clinton and Secretary Geithner meet with their respective Chinese CoChairs, State Councilor Dai and Vice Premier Wang Qishan in Washington from27-28 July 2009.74
The Chinese government is also making use of the current crisis to augment thecountry’s capabilities and search for new opportunities outside of the US throughits Sovereign Wealth Funds (SWF). At the Boao Forum for Asia in April 2009, Luo
Jiwei, Head of China Investment Corp (the main vehicle of Chinese SWF),
disclosed that he was considering investing in Europe again now that the“European officials have been humbled by the global financial crisis.75 Through its
72

China Daily, “China: US Dollar to Remain Dominance for Years” (6 July 2009).
Xinhua, “China Urges Actions to Reform Global Financial System” (9 July 2009).
74
Wall Street Journal, “Obama to Visit China, Resume Dialogue” (2 April 2009).
75
The Financial Times, “China Set to Invest Again in Europe” (19 April 2009).
73

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central bank and SAFE, China has reportedly accumulated assets amounting toapproximately US$22.7 billion worth of shares in various British industries since theonset of the crisis in 2008.76 It is noteworthy that this sum represents only a small
portion of China’s US$2.13 trillion of foreign exchange holdings.
The disproportionate impact of the current financial crisis on the US and Chinese
economies should therefore be seen in the broader context of a more assertive
China which is utilizing the present crisis to reduce its dependency on the US in an
attempt to move away from the unipolar world. The remaining section addresses
the pertinent question on how the rest of the East Asian countries have responded
to the accelerated change in distribution of capabilities between the US and China.
East Asian countries recognizing power shift and adjusting behaviors
If Waltz’s theory holds true, we will observe Southeast Asian countries again
moving closer to their Northeast Asian counterparts especially China, rather thanbandwagoning with the US. Does this mean that a second wave of regionalism as
witnessed in the post-Asian financial crisis period is in the cards for East Asia?
According to a mid-year UN report in 2009, the recovery of Chinese domestic
demand is expected to enable East Asian economy to enjoy a relatively robust
growth rate of 5.6 percent in 2010. 77 The latest field research undertaken by
McKinsey & Company reveals that China will hold the world’s fourth-largest
concentration of wealthy people by 2015.78 The writings of a powerful Chinese
economy accentuated by the present crisis are on the wall. Southeast countries
are beginning to realize the shifting distribution of capabilities between the US visà-vis other powers such as China and, to some extent, Japan. Consequently, thepast nine months following the outbreak of the crisis saw several key ASEAN
76

Michael Heng and Lim Tai Wei, Destructive Creativity of Wall Street and the East Asian
Response (Singapore: World Scientific Publishing, 2009), 162-3.
77
Xinhua, “China to Bolster East Asia Economy: UN Report” (28 May 2009).
78
Yuval Atsmon and Vinay Dixit, “Understanding China’s Wealthy” The McKinsey Quarterly (July
2009).

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countries going all out to woo the Chinese on a bilateral basis.
Signaling their intention to end trade in US dollars, Chinese PM Wen and
Malaysian PM Najib announced during the latter’s working visit to China in June2009 that Malaysia and China would be considering conducting their trade in
Chinese yuan and Malaysia ringgit for the first time.79 Burdekin explains that even
if the yuan is not ready yet to take on a greater role in Asia at this juncture, theabsence of other obvious contender within the region suggests that this is the mostviable long term option. 80 Such comments mark the genesis of an East Asianawakening to the growing might of China accentuated by the present crisis. At thesame meeting with PM Wen in Beijing, PM Najib even offered a commercial
banking license to China’s central bank on the condition that the Chinese would
reciprocate by allowing Malaysia greater access in China’s financial and banking
sector. 81 Malaysia’s rejuvenated pursuit of the Chinese market on a bilateralmodality is not at all surprising given that the country is China’s largest trade
partner among the ASEAN countries, with trade value amounting to US$39.06
billion in 2008.82
Likewise, Thailand is redoubling its efforts to deepen its economic relations with
China.

In the face of a domestic crisis with pro-Thaksin supporters, Thai PM

Abhisit Vejjajiva went ahead with a state visit to China in June 2009, leading a 300member strong contingent comprising of government officials and businessmen to
Beijing. Both premiers officiated the signing of an agreement to formalize a fiveyear trade deal between China and Thailand. During the visit, PM Abhisit went as
far as to extending to PM Wen an invitation for Chinese companies to participate in
the infrastructure projects in Thailand made available by the Thai government’s 1.4

79

Wall Street Journal, “Malaysia, China Consider Ending Trade in Dollars” (4 June 2009).
Richard C. K. Burdekin, China’s Monetary Challenges: Past Experiences and Future Prospects(New York: Cambridge University Press, 2008), 226. Burdekin also observes that the yen has been
declining in importance worldwide due to Japan’s longstanding economic weakness.
81
Bernama, “Najib: China’s Trip Was Fruitful” (5 June 2009).
82
Xinhua, “China Raises Four-Point Proposal on Tackling Financial Crisis with Malaysia” (3 June2009).
80

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trillion baht economic stimulus plan. 83 This is an unusual and unprecedented
proposition by the Thais given that stimulus packages are mostly intended to spurdomestic industries rather than overseas companies. In Singapore, the de-facto
investment arm of the government, Temasek Holdings, divested its entire stake of
BoA in the US at an estimated loss of US$3 billion in the first quarter of 2009, andexplained that it would like to “focus on global companies that aim to grow inAsia”.84 It is telling that, in the same period, Temasek Holdings raised the value of
its investment foray into the Chinese banking sector through the purchase of abigger stake in CCB, which has become the world’s second-largest lender bymarket value.85
The emerging evidence indicates that key members of ASEAN have attempted todeepen their bilateral relations with China in the current crisis, and cultivate theChinese markets by using the government-to-government approach. Separately,
the largest market of ASEAN, Indonesia is seeking closer ties with Japan.
Following Japanese Finance Minister Kaoru Yosano’s offer for Japan to guarantee
US$5 billion of bonds sold by developing countries in Bali on 3 May 2009,
Indonesia announced that its seven banks would auction US$500 million of“samurai bonds” or yen-dominated notes with the support of Japan in yet anotherindication of the waning interest in the US dollar. 86 What is common in theexamples presented thus far is that ASEAN countries are tending towards the useof bilateralism in responding to the hastened rise of China in the present crisis.
Yung warns that East Asian regionalism is at risk of evolving into an isolated region
integrated in a shallow form with China as the center. 87

Apart from the

manifestation of a Southeast Asia’s penchant for bilateralism rather thanregionalism in the present crisis, the issues to consider here are three-prong,
namely, leadership in Northeast Asia, Chinese growing interest to cultivate other83

Bangkok Post “High Hopes Rise on China Trip” (25 June 2009).
Financial Times, “Temasek Sells Entire Stake in Bank of America” (15 May 2009).
85
Reuters, “China Construction Bank Says Temasek to Raise Stake” (30 March 2009).
86
The Business Times, Indonesia Picks 7 Banks for Samurai Bond Sale” (28 May 2009).
87
Yung Chul Park, Economic Liberalization and Integration in East Asia (New York: Oxford
University Press, 2006), 244.
84

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regions, and political uncertainties in East Asia.
First, China has stepped up its cultivation of the ASEAN countries with the aim toharness a stronger leadership role in the region. That ASEAN’s FTAs with South
Korea and Japan were realized much later than the ASEAN-China FTA reinforcesthe view that China is acutely aware of its increasing importance to the region andhow they could use it to fulfill their leadership aspiration in East Asia. Shortly after
the ASEAN Summit in Pattaya in April 2009, Chinese Ambassador to Indonesia
Zhang Qiyue met with Secretary-General Pistuwan to follow up on PM Wen’s eight
proposals on strengthening the ASEAN-China cooperation, including the signing ofa US$10 billion ASEAN-China Investment Agreement to promote infrastructuredevelopment in the region, 88 as well as the provision of US$15 billion credit to
ASEAN countries.89 Explaining that the current global crisis is likely to spur further
integration among Asian markets, Dominic Barton, Director of McKinsey’s
Shanghai Office, suggests that the current global financial problems provide theleadership in this region a unique opportunity to pull together.90 However, what
Barton has failed to point out critically is that leadership is not a given matter in
East Asia.
The intense competition for regional leadership, especially in light of US’ weakened
position in the present crisis, will be a major impediment to the deepening of East
Asia regionalism or creation of an East Asian FTA. Evidently, no FTAs involving
the three Northeast Asian countries have been concluded. For example, in a bid to
fob off recent calls by China to use the yuan as the world reserve currency, Japancounter-offered a 6 trillion yen loan to financially stricken Asia to entrench the yen
as the region’s currency for trade in May 2009.91 The offer, which came just amonth after Governor Zhou’s announcement, was on top of the 3.8 trillion yen
Japan had committed to the revised Chiang Mai Initiative Multilateralization (CMIM),
88

China Daily, “China’s Proposals on Co-operation with ASEAN Appreciated” (1 June 2009).
Xinhua, “China Rolls Out Aid Package for ASEAN” (12 April 2009).
90
Dominic Barton, “Asia’s Future and the Financial Crisis” The McKinsey Quarterly (December2008).
91
Asahi Shimbun, “Tokyo Aims to Push Yen Over Yuan in Asia” (5 May 2009).
89

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which ostensibly also matched the Chinese obligation. The unprecedented pushby Japan for Asian countries to take up yen-dominated loans is a testament to what
Urata describes as an intense rivalry among East Asian countries, especially China
and Japan in a race to assume a leadership role in the region.92
The rivalry could also be observed during the negotiation by finance ministers of
the ASEAN Plus Three countries on the components of the CMIM which aimed topool together regional foreign reserves amounting to US$120 billion by the end of
2009.93 While China, Japan and South Korea agreed to contribute to 80 percent of
the fund based on a 2:2:1 ratio, a high-ranking Thai official disclosed thatnegotiations appeared to be heading nowhere until the ASEAN countries asked
Japan and China to contribute equal amounts to the CMIM funding.94 On top of its
CMIM commitments, Japan initiated a new currency swap agreement withIndonesia amounting to 1.5 trillion yen (US$15.7 billion) in July 2009.95 Unlike the
CMIM agreement which will be carried out in US dollar, the Japan-Indonesia swap
agreement is denominated in yen. These two examples again illustrate how China
and Japan are jostling for regional leadership in East Asia.

Furthermore, thestalemate is accentuated by what Pempel describes as a strong US resistance toany forms of regionalism in Northeast Asia and the wider East Asian region.
Second, the crisis has presented China with foreign policy options beyond East
Asia.

In the last decade, Amako has pertinently observed that Chinese

policymakers have begun to move toward the idea of turning East Asia into a
regional space that reflects China’s intentions and interests.96 Yet China is acutely
aware that market integration can raise the vulnerability of the host economy.
There will therefore be an increasing bias by the Chinese government towards adiversification of trading partners and export destinations. For example, China has
92

Urata, “Institutionalization of Regional Economic Integration in East Asia”, 22.
Xinhua, “Regional Cooperation Vital to Asia’s Recovery” (6 May 2009).
94
Asahi Shimbun, “Tokyo Aims to Push Yen over Yuan in Asia”.
95
Jakarta Post, “Indonesia, Japan Ink Fresh 1.5 Trillion Yen Swap Deal” (7 July 2009).
96
Satoshi Amako, “The Idea of New International Order China is Seeking and East Asia
Community”, GIARI Working Paper (December 2007), 6-7.
93

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started to expand its basket of FTAs to include more non-East Asian countries.
Since late-2008, China has conducted FTA talks with countries like Chile, Costa
Rica, Norway and Pakistan, and concluded a FTA with Peru in April 2009.97 Since
the onset of the crisis, China has also signed a series of accords for futurecooperation with Russia including in the areas of natural gas and coal during
President Hu’s state visit to Moscow in June 2009. 98 Chinese Foreign Minister
reportedly told the incoming Indian Foreign Secretary Nirupama Rao that China
was ready to work with India to promote bilateral relations.99
It is worth a mention here that non-Asian countries are as eager to court the
Chinese, especially after seeing how economies in the West were badly affectedby the global financial crisis. The Chinese, in turn, are playing their cards right. Its
Ministry of Commerce, for example, has assured the African continent that theworld economic crunch will not affect China’s aid to Africa. At the same time, thefinancial crisis has given China the opportunity to go global by securing strategic
assets at fire-sale prices such as in the mining sector in South Africa. 100
Separately, President Hu and Brazilian President Lula da Silva issued a joint
communiqué on 19 May 2009 to further promote trade and bilateral economic
cooperation between Brazil and China, which had also replaced the US as Brazil’s
top trade partner in April 2009. 101 After the issuance of the Brazil-China joint
communiqué, Brazilian officials revealed that the governors of the two countries’
central banks would be meeting soon to discussing replacing the US dollar with theyuan in their trade transactions.102 Finland and China also concluded a series ofhigh-tech contracts worth US$1 billion, and kick-started discussion for trade deals
amounting to US$2 billion during Chinese Vice-Premier Li Keqiang’s visit toHelsinki in June 2009. 103 During a working visit to Beijing, Hungarian Foreign
Minister Peter Balazs asserted to his Chinese counterpart that developing relations
97

China Daily, “China Hopes FTAs Will Help Boost Exports” (15 May 2009).
Bangkok Post, “China, Russia Ties Must Flourish in Crisis” (17 June 2009).
99
Xinhua, “China Vows to Advance Bilateral Ties With India” (14 July 2009).
100
Xinhua, “China’s Investment Expansion in South Africa ‘Only Beginning’” (15 July 2009).
101
People’s Daily, “China, Brazil Pledge Closer Ties on Trade, Economy” (20 May 2009).
102
Financial Times, “China Bolsters Brazil Trade Ties” (19 May 2009).
103
China Daily, “Finland, China in $3 billion High-tech Deals” (26 June 2009).
98

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with China was a priority for Hungary.104 The evidence therefore suggests that the
Chinese have accelerated its charm offensive in the present crisis from Africa andScandinavia to emerging markets in Eastern Europe and Latin America.

The

coming months will attest to even more Chinese advances into the non-East Asian
region.
Third, the initial postponement and last-minute cancellation of the 14th ASEAN
Summit and 4th East Asia Summit in April 2009 when anti-government protestors
stormed the meeting venue in Pattaya reflected the paramount of domestic stability
in Southeast Asia for any effective regional collaboration to take place. It has been
acknowledged that ASEAN’s role in brokering East Asian cooperation is central to
the first wave of regionalism after the Asian financial crisis. Mahbubani, in his newbook, goes as far as to say that ASEAN’s remarkable diplomatic achievement is toenable the “peaceful emergence of new Asian powers like Japan, China and South
Korea”.105 At the time of writing this paper, PM Abhisit’s Democrat Party is still
locked in an intense political standoff with pro-Thaksin supporters. As the current
ASEAN chair, Thailand’s looming domestic crisis does not bode well for theSoutheast Asian grouping. In Malaysia, the Barisan Nasional government is still
picking up the pieces after its heavy lost of five Malaysian states to the opposition
coalition led by Anwar Ibrahim during its General Elections last year.

Despiteincumbent Indonesian President Susilo Bambang Yudhoyono’s successful reelection in July 2009, a round of jockeying for key cabinet posts could be expectedin the run-up to the installation of a 23-party coalition government on 20 October
2009. Moreover, the new cabinet, led by President Susilo’s Democrat Party, will
have to face off with its longstanding ally Golkar which has now become the defacto opposition party.106 Presidential and legislative elections are also expected in
the Philippines in mid-2010, during which President Gloria Arroyo will step down as
the Filipino constitution prohibits an elected president from seeking a second term.
104

Xinhua, “Developing Relations with China is Hungary’s Priority” (4 July 2009).
Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to theEast (New York: PublicAffairs, 2008), 83-85.
106
It is possible that President Susilo may invite Golkar, whose chairman is the current IndonesianVice-President, Jusuf Kalla, to join the coalition party.
105

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Such domestic uncertainties, coupled with the age-long issue surrounding
Myanmar which has again come to the fold of international attention in recent
months with the trial of Aung San Suu Kyi on charges violating the terms of herhouse arrest, do not augur well for the next wave of regionalism.
Section V: Conclusion
The prophetic economist, Nouriel Roubini, who famously predicted the current
banking crisis in 2006, suggested that the US recession would last for two years at
an interview with Reuters in May 2009.107 His forecast was substantiated by credit
rating agency Standard & Poor’s (S&P) estimation that the US banking crisis mightend in 2013.108 At first glance, the current crisis presents an excellent window ofopportunity for East Asian countries to redouble their efforts in creating the next
wave of regionalism as seen in the decade after the Asian financial crisis of the
1990s. However, given the findings of this study nine months into the present
crisis, this paper is less than sanguine about the second wave of regionalism in thenear term.
The conditions which led to the first wave of cooperation after the Asian financial
crisis of 1997-8 no longer exist in the current crisis. Section II has shown that theneed to create a regional institution to meet the challenges of the Asian financial
crisis, as well as the widespread perception of an unhelpful US leadership, waslargely responsible for East Asia’s push towards greater regional cooperation
during the Asian financial crisis. As summarized by Thomas, the subsequent five
years saw an explosion of new regional meetings between officials and ministers
from every sector, which created a stronger sense of community between countries
in ASEAN Plus Three.109 Such conditions are not present in the current crisis.

107

Reuters, “Roubini Says US Economy May Dip Again Next Year” (28 May 2009).
The Business Times, “US Banking Crisis May Last Until 2013” (15 May 2009).
109
Nick Thomas, “Towards an East Asian Community: Implications of the EAVG Report” inKanishka Jayasuriya, ed., Asian Regional Governance: Crisis and Change (New York: Routledge,2004), 189.
108

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The recurring theme of this paper is that the present crisis has acceleratedchanges to the distribution of capabilities between the US and China. Premised on
Waltz’s theory of international relations, the conceptual framework presented in
Section III suggests that the recent US banking crisis has propelled the rise of
China, conferring the country with wider foreign policy alternatives.
Section IV has demonstrated how the structural change at the system-level has
caused ASEAN countries to intensify their efforts to seek closer ties with China
through the bilateral track, as opposed to using the regional platform.

Ashighlighted by Leifer, the balance of power in Asia is alive and well.110 In his recent
book, Beeson makes a parallel case for the declining importance of the American
economy to East Asia, arguing that China may come to be seen as a force forstability in the global economy while the US will be cast as a source of instability inthe aftermath of the current financial crisis.111 Likewise, China has geared up its
efforts to diversify its trade links with non-East Asian countries in the present crisis.
Even the US is cognizant of the rise of China and its implications.

US State

Secretary Clinton conceded that the US was “seeing particularly China come inright behind us, because countries get tired of talking to our bureaucracy anddecide that they’re going to cut a deal with someone else”. 112 Adding to thepreference for bilateralism displayed by ASEAN countries (and China) less than ayear into the present crisis, competition for leadership in Northeast Asia andcontinued uncertainties in several ASEAN countries are not favorable conditions forthe next wave of regionalism.
Despite the somewhat dismal findings on the likely pace of regionalism in thispaper, there is a silver lining on the horizon which could substantially change thelandscape of East Asian cooperation and warrant further research on. The next
three years will see Singapore, Japan and the US taking turns to host the annual
110Michael Leifer, “Truth about the Balance of Power” in Chin Kin Wah and Leo Suryadinata, eds.,
Michael Leifer: Selected Works on Southeast Asia (Singapore: ISEAS Publications, 2005), 152-4.
111
Mark Beeson, Institutions of the Asia-Pacific (Abingdon, Oxon: Routledge, 2009), 81.
112
The Straits Times, “Speed Up Aid or Lose Clout: Clinton” (25 April 2009).

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APEC Leaders’ Meeting. Evidently, Japan and Singapore are close allies of theUS, and the latter has long been pushing for a regional arrangement thatencompasses more countries in order that no large country may dominate any
regional discussions. The APEC leaders, who last met in Peru at a time when theworld was on the brink of a global financial meltdown in November 2008, had set atarget of 18 months for the APEC economies to overcome the crisis. A year into
the US banking disruption, the post-crisis talks at the next meeting in Singapore in
November 2009 are expected to include a call for APEC economies to resist
protectionism and deepen regional integration. 113

Despite celebrating its 20th

anniversary this year, APEC has regrettably been widely perceived as an institutionthat is on relative decline when compared with emerging forums such as theASEAN Plus groupings. Astute leadership from the Obama Administration andcoordinated maneuverings with its allies are critical to invoke the next wave ofregionalism through a revitalized APEC.114-----------------------------------------------------

113

Channelnewsasia, “APEC Trade Ministers to Discuss Financial Crisis Recovery” (15 July 2009).
US’ accession to the Treaty of Amity and Cooperation, a cornerstone of the ASEAN groupingndlargely ignored by the Bush Administration, at the 42 ASEAN Ministerial Meeting in Phuket in midJuly 2009, as well as State Secretary Clinton’s participation of the ensuing ASEAN Regional Forum,is a step in the right direction to create the next wave of regionalism.

114

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