For decades, Asian export powers have been pursuing a simple financial strategy: selling goods to the United States and then investing the proceeds in US assets.
As Donald Trump attempts to reshape global trade and the US economy, subverting the logic behind the $7.5 trillion investment in Asia, this model is now facing its greatest threat since the 2008 global financial crisis. Some of the world’s largest fund managers said that the divestment has only just begun.
For those who were caught off guard, the pain was already very serious. After Trump imposed tariffs on most parts of the world, the US dollar was sold off, resulting in a loss of 620 million US dollars for Taiwanese insurance companies in April alone. Subsequently, in early May, the New Taiwan dollar soared by 8.5% within two days, which led to a potential currency loss of 18 billion US dollars for their unhedged US investments.
Even before Trump was re-elected as president, the capital flow from Asia to the United States had already deviated from its historical peak. Now there are indications that this trend will accelerate: Japan’s largest life insurance company is seeking alternatives to US sovereign bonds, family offices are cutting or freezing their investments, and an Australian pension fund with a size of 96 billion US dollars has announced that its allocation has peaked. The latest data shows that China reduced its holdings of US Treasury bonds in March.
“We are in a constantly changing world order and I don’t think we will return to the previous state,” said Virginie Maisonneuve, the global chief equity investment officer of Allianz Global Investments in London. Allianz Global Investments manages assets of 571 billion euros (649 billion US dollars). This was the evolution of the order during World War II, partly because China competed with the United States in terms of economy and technology.
There are many reasons for Asian investors to seek alternatives to US assets: the growing budget deficit, the increasing political polarization and concerns about the aging of US infrastructure. The use of the US dollar – the world’s reserve currency – in sanctions against Russia has also raised concerns about the security of currency assets held by Asia. Furthermore, Trump’s tax cut policy has intensified people’s concerns about fiscal profligacy. On May 16th, Moody’s, along with other rating agencies, downgraded the credit rating of the United States, and the United States was stripped of its last top credit rating.
Stephen Jen, the CEO of Eurizon SLJ Capital, said that the shift from hoarding dollar assets to questioning the American excepentialism could lead to a $2.5 trillion or even more dollar plunge in the global market. Asset management companies and analysts said that in this situation, emerging market currencies will soar against the US dollar, stock markets from Europe to Japan will benefit from capital inflows, and at the same time, new capital will drive bond markets in countries such as Australia and Canada to expand.
For Asia, rebuilding its relationship with the US dollar will mark a reversal of the strategy formulated during the most severe period of the 1997 financial crisis. At that time, excessive reliance on short-term borrowing lacking the support of US dollar assets triggered a debt crisis, which subsequently led to a significant depreciation of the currency and a stock market crash.
In 2004, with China’s rise after its accession to the World Trade Organization and its beginning to reshape the trade and investment landscape in the region, the annual capital inflow into the United States peaked at 354 billion US dollars. At the beginning of the 21st century, in view of the high returns and growth of the United States, the world’s largest economy, Asia’s largest exporter to the United States reinvested almost every dollar into the US stock and bond markets.
David Gibson-Moore, president and CEO of Gulf Analytica, a wealth consulting firm headquartered in Dubai and with business operations across Asia, said the 2008 global financial crisis was a “major alarm bell” that exposed the vulnerabilities and risks of the US market. Over the past decade, sovereign wealth funds, family offices and institutional investors across Asia have been gradually adjusting their investment portfolios to reduce excessive exposure to US assets.
By 2024, the capital flowing into the United States from Asia has dropped to 68 billion US dollars, accounting for only 11% of the continuous expansion of the US trade surplus with the United States.
