What are the pertinent risks in China?; India’s demonetisation not to be underestimated – CAA Weekly

Key highlights from the CAA Weekly Table

• Global: US influence in Asia is already diminishing as China seizes leadership on key issues. Expectations for Trump’s economic policies pushing bond yields and USD higher, leading to higher cost of capital for Asian companies.
• Asian economies: The Indian economy was gaining momentum but the demonetization policy will slow it, allowing the Philippines replace India as the ‘bright spot’ of Asia. China and Malaysia remain on a steady growth path with downside risks.
• Asian politics: In Indonesia, the Christian-Chinese Jakarta Governor is likely to be prosecuted under blasphemy laws. But President Jokowi will eventually ensure that Indonesia remains moderate and secular. Anti-government protests in Malaysia garnered more support than last year but Prime Minister Najib Razak remains secure in power.

Risks in China: Guard against a downward spiral

• China’s recent stabilisation remains fragile. Financial indicators are flashing warnings; weak private investment is hurting growth prospects and inflation expectations are rising which could spur capital outflows and a weaker Yuan. China is also faced with the threat of being labelled as a currency manipulator by the incoming Trump administration. Finally, housing prices are frothy and increasingly unaffordable.
• Our baseline scenario remains one of episodic crises which are containable by policymaking. However, the risk of a downward spiral sparked by financial stresses has grown.

India: Negative impact of India’s demonetization not to be underestimated

• The Indian government may have underestimated the hit to growth from its demonetisation move. There is much anecdotal evidence suggesting that key sectors have been hurt by the cash shortage such as primary sector activities in Western and Northern regions and transportation across India.
• With the ‘black economy’ accounting for around 23% of GDP, the clamp down on black incomes could see diminished economic growth over a prolonged period.
• Over time, a widened tax base, fewer distortions from black market activities and an increased RBI dividend payment are likely positives. Liquidity in the banking system is also likely to improve the monetary transmission mechanism.