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In a world economy where ‘soft landing’ is the preferred scenario, Asia’s story of rebounding growth looks promising. But the rising tide won’t lift all boats, and there are at least three factors that could change the shape of this regional recovery: momentum in consumption, policymakers’ appetite for stepping up support, and the weakening external environment.
Mixed China macro
The Chinese economy is back following years of severe Covid restrictions, but the recovery is being unevenly distributed. In housing, sales are concentrated in top tier cities. A K-shape pattern is emerging among consumers, who appear happy to open their wallets for either cheap goods or luxury products, but less keen on mid-market items. Industrial activity is softer than expected and urban youth unemployment is at a record high of 20 per cent.
This is not good enough for policymakers, who have been reiterating their pro-growth stance since April’s politburo meeting. The People’s Bank of China has recently moved deeper into easing mode, cutting some benchmark lending rates after the biggest state banks lowered deposit rates. We think more easing measures are likely to follow, especially as low inflation affords Beijing some room for manoeuvre.
Other risks remain. Weaker local governments struggling to repay debt may require some central government help - even though rollover is more likely than bailout at this stage, and any aid may be delivered indirectly. A slightly weaker renminbi reflects the soft recovery and recent rate cuts, but also bolsters struggling exporters. On the plus side, households continue to add savings at near record levels, reflecting caution but also pent-up demand. Pockets of resilience are evident across the economy. The ride will be bumpy, but we expect China to comfortably reach its full-year 5 per cent GDP growth target .
Bottom-up bright spots
On a recent research trip to Hefei, a developing city in China’s Anhui province, we detected growth in the semiconductors and electric vehicle (EV) industries on the back of solid municipal support. Across the country, we see officials turning more supportive to private-owned enterprises. That gives us some confidence in the bottom-up view, despite the markets pricing in further disappointment.
Chinese equities are cheap - trading at discount of roughly one fifth versus emerging markets - though that price tag is not unjustified in every part of the market. Paradoxically, stocks that sold off on recent macro concerns look among the most promising. High quality growth companies, including leaders in the consumer and internet sectors, are well placed to weather a weaker-than-expected economy. They are also beneficiaries of ongoing industry consolidation.
Beyond China, Japan’s new central bank governor Kazuo Ueda is undertaking a multi-month inflation review that could delay, though not deny, the Bank of Japan’s exit from yield curve control (YCC) and ultimately lead to the reversal of a decade-plus of ultralow rates.
Japan’s long-term trajectory looks more promising on several counts. Upticks in retail sales and corporate governance reforms point to opportunities to unlock value in equities, where global investors are under-allocated. An end to the deflationary mentality would make room for more rational capital allocation by companies, opening the door to more buybacks and dividend pay-outs.
Turning to south-east Asia, the region continues to reap the benefits of supply chain reconfiguration, with companies opting for a “China-plus-one” strategy to offset geopolitical risks. Indonesia is planting its flag in the global EV supply chain, with Malaysia and Vietnam doing the same in electronics. More broadly, Thailand, Macau, Japan and other regional tourist destinations will gain from mainland China’s re-opening.
India’s growth is holding up with an acceleration in the first quarter, helped by stronger exports and government spending. But external demand could wane if the world economy sours, especially if the US, its biggest trading partner, tips into recession. Pressure could then build on the Reserve Bank of India to change tack and cut rates.