What does the global economy hold in store for Asian economies? China: CNY to out-perform despite Fed and PBOC’s divergent stances

Highlights from the CAA Weekly Table:

Asian political risks:

  • South Korea’s economy will slow only moderately despite higher covid-19 infections causing stricter social distancing rules. For 2022 as a whole, domestic demand will recover.
  • In India, although PMI surveys showed some deceleration in the economic recovery, other indicators such as non-food credit look robust.
  • Indonesian inflation risks are up due to robust domestic demand and the VAT rate hike.
  • In Malaysia, export growth is holding up despite some moderation. Inflation remains benign allowing the central bank to raise rates later than others.
  • Despite a weaker PMI, the Philippines should see a rebound later this year.
  • Domestic demand is beginning to look more promising in Thailand. External demand and a return of tourists should help its economy – but watch rising political risks

What does the global economy hold in store for Asian economies?

Three themes emerge from surveys and economic data for January:

  • Resurgent covid-19 infections have slowed the global recovery but there are also clear signs of resilience and optimism about the future.
  • Adjustments being made by the corporate sector and policy makers suggest that this optimism for global growth and inflation is well founded.
  • Expect global demand to continue boosting Asian economies after a modest hiccup in the first quarter. But there will be greater divergences in performance within Asia and the risk of renewed trade aggression should not be under-estimated.

China: CNY to out-perform despite Fed and PBOC’s divergent stances

Barring an abrupt outflow of capital, the evolution of the major components of Broad Balance of Payments suggest another year of Chinese Yuan (CNY) outperformance versus regional currencies, which are generally primed to weaken in response to a hawkish Fed.

  • First, the trade surplus will grow in China’s favour given the likelihood of weak domestic
    demand in China contrasted against a recovery in consumer demand in China’s trading partners, especially the G3 developed economies.
  • Second, capital inflows will also favour the CNY. Foreign direct investment has been strong
    and will remain so, boosted particularly by China’s liberalisation of its services sector which is attracting foreign capital.
  • Third, a major driver of portfolio flows will be expectations in the FX market of the CNY. The dominant factor shaping these expectations will be what the policy makers want vis-à-vis the CNY: we think they will want a strong CNY to cap imported inflationary pressures.
  • A key risk to our view, however, is capital outflows sparked off by other considerations. The
    Chinese authorities’ radical changes in regulation of big tech and the indicated shift in the political economy towards less tolerance of big capital could unnerve Chinese entrepreneurs and cause them to shift funds abroad.

Read more: CAA-Weekly0710222.pdf