Asian Insights

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What risks does China pose? ; Asia tech exports: Slowing momentum, but underlying demand resilient; Bank Indonesia can afford to go slow with tightening in 2022

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What risks does China pose?

A worsening pandemic, economic deceleration and hesitant policy making will hurt China and rebound onto the global economy.

  • China can no longer contain COVID-19 infection surges without significantly damaging its economy: there will be rolling lockdowns affecting more regions in China. Policy makers remain conflicted between different aims, which limits the effectiveness of stimulus efforts.
  • Aside from further economic downgrades within China, watch out for political surprises as well. President Xi may need to make more compromises with his rivals than he had planned to. Global growth in 2022 could be cut by another 10-20 basis points.
  • There could be geo-political consequences as well if President Xi needs an external distraction – Taiwan could endure more pressure.

Asia tech exports: Slowing momentum, but underlying demand resilient

  • Overall, we still see relatively healthy end-demand for Asian technology exports as a handover from consumer to enterprise IT spending extends the current tech cycle. Lead indicators such as Taiwan’s export orders show some slowing but to still-strong levels. This is despite a marked slowdown in orders from the Greater China region.
  • Similarly, end-demand indicators also support the positive outlook. US new orders for IT goods slowed from multi-year highs to a still-high run-rate.
  • The economies specialising in technology exports and production i.e., Taiwan, Singapore, Korea, Philippines and Malaysia will continue to outperform.

Bank Indonesia can afford to go slow with tightening in 2022

  • So long as i) inflation remains under control and ii) the Rupiah (YTD: -1.6%) shows no sign of buckling under pressure from the Fed’s tightening and downside risks in China, we believe Bank Indonesia’s tightening cycle will only commence in 2H22.
  • The economic outlook looks more promising. The unwinding of COVID-19 restrictions is likely to provide a fillip to the tourism sector and earnings, which in turn will support the external position and Rupiah.
  • We now pencil in 3 x 25bps rate hikes (as opposed to just 2 x 25bps), given the Fed’s now more aggressive tightening stance. The first rate hike could come as soon as June, particularly if the Fed opts for back-to-back 50bps rate hikes in April and May.

Highlights from the CAA Weekly Table:

  • Malaysia: Inflation remains well-behaved due to base effects. Bank Negara is likely to allow the recovery to take its course, avoiding a rate for now. A 25bps hike to the policy rate is likely in July.
  • Philippines: The economy is likely to be boosted by a stronger-than-expected showing by remittances, mainly because of the reopening of economies across the globe that buoy labour markets and wages.

China: Downward pressures evident; policy response falling short; Singapore: More monetary policy tightening likely; Singapore: Political succession clarified, what will the next steps be?

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China: Downward pressures evident; policy response falling short

  • Growth in GDP, industrial production and investment was stronger than expected in 1Q22. But, consumption was severely hit and the portents are for sharply slower growth in 2Q22. Despite easier credit conditions and local government support, home buyers are still not boosting home buying, evidence of the damage done to consumer psychology. An unfavourable feedback loop is developing, whereby deteriorating household sentiment weighs on property demand and therefore real estate investment.
  • Policy response is now critical yet appears to us to fall far short of what China needs to stabilise growth. The authorities insist on favouring supply-side measures e.g., tax and fee cuts but without demand-side measures such as cash grants to households, stimulus efforts will be less efficacious.

Singapore: More monetary policy tightening likely

Three factors argue for more monetary tightening in October:

  • Global inflation will remain elevated because of continued supply chain disruptions and upward pressures on energy and food prices.
  • There will be less slack in the economy due to strong growth in the domestic sectors.
  • Inflationary expectations need to be anchored.

Singapore: Political succession clarified, what will the next steps be?

  • Finance Minister Lawrence Wong has been named as successor to Prime Minister Lee Hsien Loong. The succession process this time did not appear to be as smooth as before but Wong is likely to preside over a united party, having strengthened his claim to leadership through his deft handling of the pandemic.
  • There are few signs that Wong’s elevation will produce fundamental changes in policy direction in Singapore. Wong has generally adhered closely to Lee’s policies and philosophical leanings in his public statements. But there may be changes in style.

Highlights from the CAA Weekly Table:

Asian economic prospects

  • India could struggle to achieve the strong rebound expected. Consumption and investment demand remain tepid while monetary tightening and power shortages will exert a drag.
  • South Korea is set to see back-to-back rate hikes: Incoming BoK Governor Rhee backed recent rate hikes: He sees the need for tight money when inflation is high and inflation expectations are volatile.
  • In Indonesia, rising inflation is beginning to hurt spending: Consumer confidence is down and retail sales losing momentum.
  • In Malaysia, firming domestic demand should offset weaker external demand: Indicators of domestic demand are perking up. Infrastructure construction such as the East Coast Rail Line is also regaining momentum.