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China: Focus is on spurring growth, stability could be sacrificed; Indonesia: Key takeaways from our research trip – CAA Weekly


Highlights from the CAA Weekly Table

  • Global developments: The global trade outlook remains clouded by the intractable trade spat between US and China. Given the numerous failed attempts, China may wonder whether negotiating with the US would be useful at all. Cracks are appearing in the global economy as lead indicators continue their descent while emerging markets are not out of the woods yet. However, the US economy remains indefatigable.
  • Asian politics: With the political ban partially lifted and the last two of ten organic bills required for elections royally endorsed, Thailand is set to head for the polling booths come February 2019. More political frictions are likely in Malaysia as PM-in-waiting Anwar Ibrahim will make his return to parliament soon via a by-election.
  • Asian economies: In India, stability concerns plague the fast-growing economy, as prices are poised to surprise on the upside while the rapidly-weakening Rupee prompted a series of near-term countermeasures by the government. In the Philippines, the second package of tax reforms has been passed by the House but the Senate could be a hold-out in light of the looming mid-term elections in eight months’ time.

China: Focus is on spurring growth, stability could be sacrificed

  • Chinese economic growth continues to trundle along, even as conflicting policy objectives of growth and deleveraging weigh on the minds of policymakers.
  • As investment is a critical driver of economic growth, its sharp deceleration is a bad sign for future growth and stability. More aggressive policy actions are required.
  • Chinese policymakers are faced with a stark choice between growth via stimulus or stability through painful but necessary reforms – two conflicting policy objectives.
  • Reforms will take a back seat for now, to be rejuvenated when economic conditions are much kinder. The key risk is weakening sentiment regarding the Chinese economy which could lead to outflows from currency and asset markets – which why the government is keen to showcase solid growth impetus.

Indonesia: Key takeaways from our research trip

  • First, policymakers are alert and cognisant of the souring risk environment.
  • Second, the bandwidth of policymakers and technocrats is diverted toward maintaining macroeconomic stability in the face of substantial Rupiah weakness, with Bank Indonesia likely to follow through with a few more rate hikes in the remainder of 2018.
  • Third, election-year spending is likely to offset the contractionary effects of tightening monetary policy while the weak pass-through between the currency and inflation suggests prices will remain largely benign.
  • Last, more measures are needed to address the underlying problems, viz., a lower-than-desired savings rate alongside the dearth of FDI in export-oriented manufacturing.

Global economy: PMIs reveal sanguine outlook, albeit with moderation; Malaysia: The honeymoon is over, now for the governing – CAA Weekly


Highlights from the CAA Weekly Table

  • Global trade regime, Asia in the crosshairs next? The US is poised to press on with tariffs on USD200bn of Chinese goods, with President Trump upping the ante by threatening tariffs on an additional USD267bn of Chinese goods. If the US gets its way with Canada on NAFTA, it would feel its aggressive trade tactics had been vindicated and Asia would be next, with Japan most likely to come under pressure.
  • Asian politics: In China, a rare about-face by the authorities to defer hikes to the social security levy in the face of popular protests betrayed a sense of insecurity within the government. In Thailand, the military Junta has been taking steps to extend its rule well after the 2019 election which is supposed to restore civilian rule.
  • Asian economies: RCEP negotiations are stumbling over India’s stubborn refusal to budge on key issues. As for external demand, data from trade bellwethers such as Korea and Taiwan signal a strong export outlook. Sluggish GST revenues in India reignited concerns of fiscal slippage, in spite of buoyant growth. Indonesia’s government unveiled a slew of measures to stem the Rupiah’s fall but the measures are more reactive than proactive. In the Philippines, galloping inflation is chipping away at the authorities’ credibility but at least several fiscal reform packages have now cleared hurdles in the legislature. Buoyant domestic demand is driving the Thai economy, providing impetus for BOT to raise rates by end-2018.

Global economy: PMIs reveal sanguine outlook, albeit with moderation

  • Two trends emerge from recent data. First, the global manufacturing economy remains in remarkably fine fettle despite trade war concerns while forward-looking indicators are positive as well. This upbeat outlook bodes well for Asian exporters.
  • Second, the US economy is, if anything, too strong: the labour market is likely to tighten with spillovers into wage growth and inflation. It will not be long before Asian economies have to grapple with the fallout induced by a quicker pace of Fed monetary tightening.

Malaysia: The honeymoon is over, now for the governing

  • As the post-election euphoria subsidies, political risks will rise. First, the underlying Anwar-Mahathir tensions could intensify, giving way to infighting within the ruling coalition and ramifications for policymaking and governance.
  • Second, a slew of populist measures, such as the removal of GST and re-introduction of fuel subsidies, will weigh on the already-stretched public coffers.
  • Third, the review of the affirmative action programme that has benefited the majority Bumiputera community could spark a backlash from the dominant Malay community which has been the primary beneficiary.
  • Last, East Malaysian states will continue pressing for more rights, especially over the division of resource revenues.