Nikkei Asia

Asia-Pacific should use its increasing wealth more productively

More investment in intangible assets will help recalibrate the region's economy, write Jonathan Woetzel and Joydeep Sengupta in Nikkei Asia. 

The world is wealthier than ever before, with its net worth tripling from 2000 to 2020.

Such robust growth is a cause for celebration as it equips us to take on new opportunities, but the divergence between net worth and gross domestic product raises critical questions for policymakers and business leaders.

In Asia-Pacific, wealth grew fourfold, with the region now accounting for some 42%, or $218 trillion, of total global wealth. Net worth has risen some $360 trillion since 2000 globally, and $165 trillion of that growth occurred in the Asia-Pacific region. Wealth levels relative to GDP are particularly high in the three Asia-Pacific countries included among the 10 countries in our research -- Australia, China and Japan.

Globally, net worth departed from its long-term relation to GDP, mostly due to rising real estate valuations. While the global economy was battered by financial crises and now the pandemic, net worth has continued to march upward at a steady clip. Driven by asset price inflation, net worth is now almost 50% higher at the global level than its long-run average relative to GDP.

China has had by far the biggest expansion in its net worth, accounting for fully one-third of global wealth growth. As its economy boomed, more and more of its citizens moved into the middle class and investment soared.

In 2020, China's net worth stood at 8.2 times its GDP or $120 trillion, higher in comparison to GDP and in absolute terms than any other country in our research, which also included Canada, France, Germany, Mexico, Sweden, the United Kingdom and the United States. On a per capita basis, Chinese net worth stood at $86,000, or 591,000 yuan, up from $5,500, or 46,000 yuan, in 2000.

That has, in turn, fueled expanding net worth in other countries that supply China with the resources and supplies used to drive its economic success. For instance, mineral reserves in Australia have risen in value due to demand from China and elsewhere, supporting growth and higher valuations in other parts of the economy.

Similarly, China has long supported the Japanese economy with its demand for chipmaking equipment, high-end plastics and consumer products.

Australia saw its net worth growth outpace its GDP growth as well, increasing over the past two decades from five times to 6.8 times GDP in 2020, higher than the global average of 6.1 times GDP.

More than 80% of the country's net worth growth stemmed from asset price growth rather than investment, particularly as valuations of household real estate but also minerals and other real estate rocketed. Net worth rose to $351,000 per capita in 2020, the highest among the 10 countries surveyed.

Japan is the only country in our sample that experienced declining asset valuations and merely a relatively modest increase in net worth relative to GDP, from 6.6 times GDP in 2000 to 7.2 times GDP in 2020. Real estate values in Japan declined after the bubble burst in 1990 and have never fully recovered.

Nonetheless, net worth in absolute terms expanded by 10% from 2000 to 2020, thanks to strong net investment in public and private infrastructure and exports that expanded Japan's net international investment position.

While rapid expansion and high levels of wealth in Asia-Pacific are a good thing, the divergence between net worth and GDP raises important questions for policymakers and business leaders.

At a global level, rising asset valuations on the back of growing debt might signal a paradigm shift, or might alternatively signal a future reversion to mean, as has happened in historic episodes, including in Japan.

Regardless of what the future holds, they clearly signal an opportunity to deploy more capital more productively and to recalibrate the economy to accelerate GDP growth so that the economy catches up to where wealth already is.

Asia-Pacific countries, notably China and Japan, already have twice the investment relative to GDP in public and corporate non-real estate than the other countries in our sample, but there is scope for more.

For example, a recent McKinsey Global Institute research on climate risk shows enormous potential in Asia to shift reliance on coal-based power to solar, wind, hydrogen and other alternative sources of energy. Developing batteries and other types of storage for these new sources of energy is another potentially lucrative area of investment.

Retooling the industrial sector that makes Asia the largest greenhouse gas emitter offers another productive avenue of investment, as does improving agricultural practices to reduce water consumption and ending deforestation.

Opportunities to invest more in intangible assets and becoming a bigger supplier of intangibles could also spur economic growth. The region can leverage its huge pool of tech talent to pioneer digital technologies, increase its provision of software and services, and expand digital operations across its vast manufacturing base.

The energy transitions needed to tackle climate change and other sustainable development goals require unprecedented investments, so opportunities to put our wealth to better use abound. Such investments would protect and preserve our wealth and build new stores of value for our generation and the next ones.

This column originally appeared in Nikkei Asia.

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