Asian Insights

Key highlights from the CAA Weekly Table

• Global: US influence in Asia is already diminishing as China seizes leadership on key issues. Expectations for Trump’s economic policies pushing bond yields and USD higher, leading to higher cost of capital for Asian companies.
• Asian economies: The Indian economy was gaining momentum but the demonetization policy will slow it, allowing the Philippines replace India as the ‘bright spot’ of Asia. China and Malaysia remain on a steady growth path with downside risks.
• Asian politics: In Indonesia, the Christian-Chinese Jakarta Governor is likely to be prosecuted under blasphemy laws. But President Jokowi will eventually ensure that Indonesia remains moderate and secular. Anti-government protests in Malaysia garnered more support than last year but Prime Minister Najib Razak remains secure in power.

Risks in China: Guard against a downward spiral

• China’s recent stabilisation remains fragile. Financial indicators are flashing warnings; weak private investment is hurting growth prospects and inflation expectations are rising which could spur capital outflows and a weaker Yuan. China is also faced with the threat of being labelled as a currency manipulator by the incoming Trump administration. Finally, housing prices are frothy and increasingly unaffordable.
• Our baseline scenario remains one of episodic crises which are containable by policymaking. However, the risk of a downward spiral sparked by financial stresses has grown.

India: Negative impact of India’s demonetization not to be underestimated

• The Indian government may have underestimated the hit to growth from its demonetisation move. There is much anecdotal evidence suggesting that key sectors have been hurt by the cash shortage such as primary sector activities in Western and Northern regions and transportation across India.
• With the ‘black economy’ accounting for around 23% of GDP, the clamp down on black incomes could see diminished economic growth over a prolonged period.
• Over time, a widened tax base, fewer distortions from black market activities and an increased RBI dividend payment are likely positives. Liquidity in the banking system is also likely to improve the monetary transmission mechanism.

• Global: The OECD composite leading indicators point to steady global growth, but this reviving global momentum will have to withstand the uncertainty caused by political developments in the US. The case for Fed tightening in December remains strong.
• Asian politics: The provocative actions of the Localists in Hong Kong provoked China’s intervention which has increased worries over Hong Kong’s autonomy.
• Asian economies: Central banks across Asia held their fire power. In China, weaknesses in foreign trade could be exacerbated by trade wars President-elect Trump follows through on his campaign rhetoric. Taiwan’s growing exports point to a positive near-term outlook for Asia’s export-driven economies. India’s surprise de-monetisation could see the economy slow in the short-term, but the bold move bodes well for India’s prospects.

A Trump presidency poses multiple risks for Asia

• The election of Donald Trump as the President of the United States will weaken the US by deepening political rifts there as his policies will create strong backlashes, adding to ongoing controversies which will distract him from effective leadership. American exceptionalism will be diminished with many ill effects being visited on Asia.
• Asia’s trade-driven economies have every reason to fear possible protectionist measures while his demand to reconfigure existing trade agreements and repudiate the TPP puts a halt to further trade integration. Geopolitical stability could also be compromised by American rivals such as North Korea testing the new and inexperienced President.
• The biggest losers in Asia are small and highly open economies that depend on the US as a market and as a security guarantor such as Taiwan and Singapore. China will be a target of trade measures at a time when the painful rebalancing its economy is undergoing makes it more vulnerable to exogenous shocks. North Korea will also become a growing threat to South Korea and the region.

How have risks for Asia changed recently?

• With the global economy gaining momentum and showing signs of rising trade intensity, Asian exporters can expect a pick-up in external demand. Coupled with expansionary policy support, Asia could see a strong rebound.
• However, the impact of one-off shocks could prove to be more damaging and reverse the gains Asian economies have been seeing more recently. We assess the prospects.