China drives growth. The U.S. Federal Reserve determines interest rates. That sets us up for tensions that few investors fully appreciate. No surprise: Both are spurring regional economies at the moment. China's economy has soared over the past year, driving trade and lifting growth across much of Asia. The Fed has gingerly raised rates at the same time, but hardly enough to discourage funding for Asian businesses and households. It may not always be so. At its Sept. 20 policy meeting, the Fed held rates but hinted at increases ahead. And that poses risks to the region.
Think back to the decades before the global financial crisis. The U.S. economy was Asia's primary growth engine. Soaring imports would lift growth across the region as American consumers bought more shoes, electronics, bicycles, and much besides. Interest rates also followed the U.S. cycle, rising when growth was brisk and falling when demand slumped. A neat process that finds an equilibrium over time, as Asia's economy was tethered to that of the U.S.