Increased US-China contestation: near term risks likely contained; China: Contemplating reforms to insulate itself from US financial sanctions; Asian export growth to remain robust in 2022 despite headwinds

Increased US-China contestation: near term risks likely contained

As the US and China step compete harder for influence, major implications will follow:

• In the near term, these moves show each side trying to be better-positioned for more purposeful talks than the unproductive exchanges that have been held thus far between Beijing and the Biden Administration; BUT
• For the longer term, however, there is little doubt that the contestation between the two big powers over the Indo-Pacific region has hardened. Political risks will grow but there could be silver linings in terms of production relocation from China to Southeast Asia.

China: Contemplating reforms to insulate itself from US financial sanctions

We need to look beyond cyclical moves to stimulate China’s economy.

• Geo-political vulnerabilities argue for Chinese leaders to undertake reforms that they have long avoided but the practical and political obstacles to these reforms are significant:
• We believe that once the current slowdown is contained, a policy of faster appreciation of the Yuan is possible, so as to rebalance the economy. We also see more liberalisation of the capital account.
• However, other necessary moves such as filling the gaps in social safety nets which leads to high savings rates will take longer to implement. Ideological obstacles will probably delay reforms to alleviate institutional constraints on the more productive private sector.

Asian export growth to remain robust in 2022 despite headwinds

• Asian exports are set to moderate from the double-digit pace in 2021, as the economic recovery in advanced economies matures and consumer spending shifts back to services.
• Our Asian Trade Indicator points to export growth moderating from double-digit levels to trend levels of growth.

Implications of recent developments:

• Asian monetary policy: Despite a pronounced preference to support growth and look past the supply-side factors driving inflation, it is unlikely that Asian central banks can withstand the wave of monetary tightening elsewhere in the world. Expect a faster pace of monetary tightening across the region.
• India: The government’s measures to tackle inflation are unlikely to move the needle on price pressures given the narrowing output gap and release of pent-up demand. We fear that the Reserve Bank of India will be pressed to intervene to keep yields in check, considering the record quantum of borrowing that markets have to take in, at a time of risk aversion and capital flight from emerging and more risky assets.
• Indonesia – reforms to proceed: The government successfully amended the constitution to pave the way for game-changing labour reforms. But policy flip-flops in other areas have been damaging.
• Singapore – both external and domestic demand look strong: Despite official caution, we stick to our above-consensus forecast of 4.4% growth this year.

Read more: CAA-Weekly-30-May-22.pdf