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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.

Singapore: Recalibrating our growth forecasts amid cross-currents; Taking stock of foreign direct investment in Asia


Singapore: Recalibrating our growth forecasts amid cross-currents

  • A number of headwinds including supply disruptions abroad, a weaker outlook for financial services (15% of GDP), and slower growth in the real estate sector following macroprudential tightening prompt us to lower our 2022 GDP growth forecast to 4.4% from 5.4% previously.
  • We see these headwinds partially offset by an earlier-than-expected reopening of the economy, though the reopening impulse is also blunted by a recovery in outbound tourism.
  • The balance of risks to growth is tilted to the downside, with the magnitude and persistence of these growth drags potentially larger if the Ukraine-Russia conflict escalates further and/or the US capex engine loses momentum.

Taking stock of foreign direct investment in Asia

  • After declining sharply in 2020, FDI in Asia has recovered spiritedly.
  • The robust recovery reflects continued investor confidence in the region. The efforts made by Asian economies to improve their business environment have yielded fruit, but there remains much more room for improvement.
  • The robust recovery reflects Asia’s continued importance in global value chains, particularly the electronics global value chain.
  • FDI in Asia is poised to grow even further with the implementation of the Regional Comprehensive Economic Partnership (RCEP) and the relocation of supply chains from China.
  • Massive government infrastructure spending programmes in various Asian economies will also lift FDI inflows in the medium-term.
  • Flows of FDI into high-tech economic sectors and FDI related to the secular trends of climate change and the digital economy will facilitate structural economic changes in the region.

Implications of Recent Developments:

  • Biden’s apparent commitment to defend Taiwan will further worsen US-China mistrust, leading to more Chinese efforts to pressure Taiwan.
  • External demand holding up: Malaysian exports to G3 economies and China remained strong. The moderation in import demand could be indicative of slowing goods demand, which is likely to reflect the diversion in spending back to services.
  • Higher inflation risks in the Philippines where the policy rate was raised ahead of expectations, following minimum wage hikes that will supercharge inflation pressures. Expect more rate hikes this year.
  • More worrying signs from China: There are now more indications that the policy response in China would prove ineffectual in spurring a recovery in the second half of the year.
  • Thailand’s 1Q22 GDP print masks underlying weaknesses: inflation is taking a toll on private consumption and investment, but it is not reflected in the numbers because of the ongoing normalisation of economic activity. It seems like the BOT is maintaining a dovish tilt despite the pressures of sharp inflation in the economy.