China: Major policy U-turn underway; Asian currencies: Capital flows to offset other drags

China: Major policy U-turn underway

Vice-premier Liu He convened a rare policy meeting to signal a major policy “U-turn” that paves the way for more concerted pro-growth policies to be introduced soon.

• The recalibration of policy reflects behind-the-scenes pushback on the broad direction of economic policy undertaken by President Xi since the start of 2021. The economic costs of the campaigns to restrict lending to property firms and curb the “disorderly expansion” of capital, and of the government’s zero-COVID stance etc., are being reconsidered.
• While January-February activity indicators beat expectations by a significant margin, the “true” growth rate is probably lower than indicated by official statistics. A host of alternative measures of activity we track point to sluggish demand and weak sentiment.
• What this means for China going forward – higher policy risks in the medium-term as policy and/or regulatory excesses over the past year are unwound in the coming months – with the possibility of a renewed crackdown once the economy is on surer footing.

Asian currencies: Capital flows to offset other drags

The onset of monetary normalization in developed economies and rising geopolitical risk premia leads us to re-examine the trajectories of the region’s currencies.

• Normalising current account balances in 2022 will exert a drag on Asian currencies save for the PHP, IDR and SGD, but positive real yield differentials would cushion the adjustment to varying degrees – the greatest offset seen across INR, IDR and PHP..
• The likelihood of robust FDI inflows into Indian and perhaps Indonesian assets could limit depreciation pressures on both currencies. Robust FDI flows could help the MYR outperform.
• We expect relative underperformance in the INR and the IDR, and view the KRW, TWD, and SGD as likely outperformers.

Highlights from the CAA Weekly Table:

Asian political risks:

• Underlying trends in Malaysia suggest that an early general election which now seems likely will do little to improve long term stability.

Asian economic prospects: 

• Indian inflation accelerated but there is little sign that the central bank will respond firmly.
• Indonesia’s robust export growth reflects how well it is doing from rising commodity prices.
• The Philippines’ outlook is improving, given the easing of pandemic-related restrictions.

CAA Latest table of forecasts

Source: Centennial Asia Advisors. Forecasts for India are on the basis of the fiscal year ending March. Figures in parentheses refer to previous forecast. Figures in red indicate a downgrade; green signal an upgrade.