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Monday, January 08, 2018, 12:44
China drives emerging Asia
By Karl Wilson in Sydney
Monday, January 08, 2018, 12:44 By Karl Wilson in Sydney

Regional economies are increasingly in sync with the growth trends and policy initiatives of their giant neighbor

Workers at a construction site for an expressway in Manila on March 8. Investment approvals in the Philippines soared to a 50-year high last year. (PHOTO / AFP)

There used to be a saying: “When the US sneezes, Asia catches a cold.” It was often used to illustrate just how dependent Asian economies had become on the United States for economic growth.

China is now the engine that drives Asian growth, although the US should not be ignored altogether.

Frederic Neumann, co-head of Asian Economics Research at HSBC, best summed it up recently when he said: “China is now what matters for growth, both regionally and globally.”

For exporters across Asia, Chinese consumers now matter the most.

Neumann noted that more smartphones are sold in China every year than in the US. And the components for these smartphones come from countries across Asia. He said commodities from Indonesia and Malaysia are now sold mostly to Chinese manufacturers and not to American firms.

In Thailand and Japan, for example, Chinese mainland tourists are filling hotels and malls. 

“Then there is investment: China is building plants and infrastructure through much of ASEAN (the Association of Southeast Asian Nations) and further to the west. An integrated and increasingly inward looking Asian economy is in the making,” Neumann said in the bank’s global outlook.

His comments came before the US House of Representatives and Senate approved President Donald Trump’s sweeping tax bill, the Tax Cuts and Jobs Act.

While most ASEAN economies have done well over the last decade, analysts say it is too early to say just what effect the US tax cuts will have on the region.

Taimur Baig, chief economist and managing director for group research with Singapore-based DBS, said he did not think the tax cuts will have a major impact on the “direction of the US dollar or rates”. 

“On the currency (front), there has been a lot of talk about how flows could be diverted to the US, thus strengthening the dollar. But this line of reasoning ignores the fact that most US corporate earnings kept overseas are already in US dollar-denominated assets,” he said. 

“Indeed, many companies that leave cash abroad have issued bonds in the US (Apple being the most notable example). As they repatriate (these funds), these companies will issue less bonds, leaving the overall supply or demand for US dollar-denominated assets largely unchanged.

“If growth soars and the US equity market becomes an even bigger draw than it already is, the (US) currency would appreciate, but that scenario can be envisaged without a tax cut in any case.” 

Analysts say lower tax rates increase returns on capital, potentially diverting investment from the rest of the world to the US. 

Baig, however, said this is probably a bigger risk for Europe and Latin America than Asia. 

“Multinational corporations that were, on the margin, considering offshoring some production may pause to take advantage of the lower domestic rates, but the factors of production that are Asia-oriented, especially those related to the electronics supply chain, are very unlikely to move back to the US,” he said.

“The labor cost advantages, economies of scale and the component ecosystem are well-engrained in Asia, with little risk of (foreign direct investment) diversion to the US.”

The Manila-based Asian Development Bank (ADB) said robust labor markets, buoyant infrastructure spending and strong global demand contributed to lifting growth in the ASEAN region in 2017 to 5.1 percent — a four-year high for the 10-nation bloc.

ADB economists say these tailwinds are expected to remain largely in place and fuel another year of vigorous growth in 2018. 

Firm demand for technological goods will support exports of electronics, while higher commodity prices will support exports of minerals.

They say business-friendly reforms and a pipeline of infrastructure projects should boost investment. 

A busy political calendar too could result in higher government spending ahead of elections in the region during the year. 

Malaysia is due to hold general elections sometime between March and May. Indonesia is to hold regional elections in June, while general elections are expected to take place in Thailand in November.

Seck Tan, assistant professor at the Singapore Institute of Technology and adjunct assistant professor at the Lee Kuan Yew School of Public Policy, said China has played a substantial role in the turnaround of most regional economies.

This has been largely driven by China’s continued appetite for commodities to fuel its energy-heavy industries and strong demand for consumables from its growing middle- to upper-class population.

“Although the Chinese economy is anticipated to slow by about 0.5 percent this year, it will continue to drive demand for commodities and consumables in order to sustain its employment numbers,” Tan told China Daily Asia Weekly

He said China’s demand for commodities has benefited commodity-rich Australia. At the same time, the consumption-led Chinese economy is driving the ASEAN economies and Japan.

The weak US dollar has also seen capital pour into the region, especially in countries like the Philippines. 

Investment approvals in the Philippines by the Board of Investments soared to 617 billion pesos (US$12.3 billion) in 2017, the highest in the board’s 50-year history, according to a report on Dec 19 in The Philippine Star. This was 39.5 percent more than 2016.

According to the report, the investments totaled 426 projects, mainly in the infrastructure and power sectors. The agency said these projects would generate around 76,065 jobs when fully operational.

“This validates business confidence in President Rodrigo Duterte’s economic programs to ensure inclusive growth and shared prosperity for the country. The influx of investments is definitely steamrolling, as we are expecting sustained higher investments for the next five years,” Philippine Trade Secretary Ramon Lopez told the newspaper.

HSBC’s Neumann does not share the same enthusiasm for Asia as many of his colleagues.

Now partly tethered to the US Federal Reserve Board and its interest rate policy, and partly to Chinese growth, much of emerging Asia is in a “precarious situation”, he said.

“Tensions are building that may expose a fault line, now unappreciated. Monetary conditions may in the future no longer suit the region’s growth prospects,” Neumann said. “China’s torrid pace of development, after all, is likely to cool. A new ‘regulatory storm’ is sweeping the (Chinese) mainland.” 

Neumann also drew attention to the fact that “hardly a week goes by without new stipulations for the country’s financial institutions to curb their risky lending”. 

These new regulations in China “may not yet have made a dent, but regulators are pressing ahead”, he said, adding that they are “hinting they will push for full implementation in 2018”.

He also cautioned: “Without other reforms, such as that of State-owned enterprises, slowing credit is bound to curb demand. When China sneezes, emerging Asia may need more than a scarf.” 

At the same time, it is worth noting that the Fed is tightening the screws. Not rapidly, but unrelentingly. 

Over the coming months, the US central bank will likely announce a gradual reduction of its balance sheet. It is unclear how this will affect capital flows, and hence funding costs, in emerging Asia. 

“Investors, for now, seem relaxed. The US economy appears robust enough to take the monetary squeeze in its stride. Less certain is whether Asia can,” Neumann warned.

He pointed out that in recent years debt has climbed inexorably in many economies, such as Hong Kong, South Korea, Singapore, Malaysia and Thailand. Yet, funding costs have dropped, due in large part to a “generous Fed and a weaker dollar”. 

“The latter has kept local inflation bottled up and encouraged foreign investors to park their funds in Asia.”

karlwilson@chinadailyapac.com


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