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As the West grapples with high inflation, rising interest rates and potential recessions, the outlook for Asia is more sanguine. We see three main areas that will set the stage for the region’s economies and markets in the coming months: the sustainability of China’s reopening rebound; how that translates into the real economy and sectoral beneficiaries; and how the knock-on effects of both, as well as weaker external demand, translate to the rest of the region.
One important signal from China’s annual parliamentary meeting in early March was top leaders’ increasing emphasis on high-quality economic growth, which requires the restructuring of the economy from an investment, export-driven model to something more balanced, relying on consumption and manufacturing. This was reflected in the modest annual growth target of around 5 per cent set at the meeting. Policymakers may also roll out limited stimulus measures to support the economy, with more focus on the quality rather than the pace of recovery.
Another key theme is China’s focus on self-reliance in areas like science and technology, reflected in President Xi Jinping’s pledge to boost high-end manufacturing as well as the proposed institutional changes, including the reshuffling of the department overseeing the technology sector and the creation of a bureau managing data resources. The moves may help Chinese companies to compete with global competitors in advanced technology and bring faster development to the digital sector. We believe Chinese policymakers will continue to increase support for homegrown firms working in sectors like semiconductors, advanced machinery and new technologies.
Even before the parliamentary meeting, consumer spending and home prices had started to show signs of a rebound, fuelled by pent-up demand after three years of Covid restrictions. A full recovery may not be far away.
However, middle-class Chinese are taking a cautious approach. Whether the recovery can be sustained will depend on consumers lifting their income expectations and feeling confident enough to tap the huge amount of excess savings they amassed during the pandemic.
Reviving and boosting consumption has topped the government’s agenda since the end of the zero-Covid policy. We expect the government to roll out more supportive measures.
Official data and our observations during recent research trips around the mainland both show new signs of heightened housing market activity in China’s top-tier cities. But it is still uncertain when the recovery will make its way to lower-tier cities, where there is a larger amount of unsold inventory. While the government won’t rely on an old growth driver to boost the economy, a stable real estate sector is important to the recovery in the short term, and so we expect to see support for both the supply and the demand side.
We also expect China’s 2023 inflation to stay below the official target of 3 per cent, allowing the authorities to maintain relatively accommodative policy.
Looking elsewhere, we are monitoring a potential modification or even an end to Japan’s yield curve control (YCC), as inflation ticks up.
If YCC becomes history under new central bank governor Kazuo Ueda, rising rates in Japan could have a colossal impact on global capital flows. Over the years, ultralow rates have spurred Japanese investments abroad and made Japan the biggest creditor nation in the world. Once the tides turn and repatriation picks up, new opportunities will emerge in Japanese assets benefiting from capital inflows and a stronger yen.
In Southeast Asia, economic outlooks are generally brightening following China’s reopening, although more export-oriented economies like Malaysia may face headwinds from slowing demand in the West. With close ties to the world’s second biggest economy, countries in the region have received a major boost in trade, manufacturing, and tourism over the last few months.
Elsewhere in Asia, India is showing signs of slowdown, although it’s still on track to lead regional GDP growth this year. In the country’s financial markets, we are still seeing selling pressure on concerns from foreign institutional investors about high valuations. Rising borrowing costs and global recession risks may be dragging on consumption and manufacturing in India, where economic correlation with the US, its biggest trade partner, is higher than in most Southeast Asian countries.
View our latest Quarterly Outlook including a deck showing how we are thinking about China’s reopening and its investment implications.