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After a phase of quiet recovery and progress in , and a year of growth in that went almost unnoticed between pessimistic economic headlines, uncertainty overshadows the Asia Pacific region this year. The trade tensions between China and the US are casting the longest shadow, with the general unsettlement of this situation causing ripples in market performance, interest rates and other indicators. But while the trade tensions are the main feature, they are certainly not the only story in this varied region.
The trade tensions between the U. Ultimately, the US and China share a common interest in seeking to avoid a global economic downturn, the risks of which have grown. In the US, the financial tightening and loss of confidence caused by corrections in the US stock market coupled with an inverted yield curve have increased fears of a slowdown, which would be a concern for the US administration. Short-term issues could be resolved through greater imports of US products and limited deregulation in certain sectors, such as financial services, healthcare and auto.
However, greater purchases of US imports may result in trade friction with other trading partners.
Southeast Asia Economic Outlook 2018
In the short term, the best policy response for China is to slash import tariffs significantly. In the medium term, China must address the thorny issues of Intellectual Property rights IPR protection and perceived forced technology transfers. The lag in terms of IPR protection could be compensated for by faster liberalisation, especially by relaxing Joint Venture JV requirements in sectors where profits remain sturdy. Again, the automotive and service sectors would be great places to start. The auto industry remains highly fragmented even today.
The auto-sales slowdown should have given policymakers a wake-up call, making it clear that further subsidies could only delay but not avoid the agony of consolidation. To help domestic carmakers make this transition, one solution would be to have greater fiscal outlays on social safety nets and job re-training for dislocated workers. Decisive action on relaxing JV requirements would send a powerful signal that China is committed to making the domestic market a genuinely open and fair place. The worst-case scenario is a continued impasse, weighing heavily on both stock market sentiment and private investment.
That would also make it increasingly difficult for Beijing to execute certain much-needed domestic reforms, such as relaxing joint venture JV requirements in certain sectors and increasing foreign ownership in the financial sector. In this case, a lower RMB exchange rate would boost exports and loosen monetary conditions. The best way for the world economy to avoid losing its two key economic locomotives in a single swoop?
Should miscalculations cause US-China tensions to escalate, most Asia Pacific economies are likely to suffer. Even if there were eventual benefits to selected ASEAN economies such as Thailand and Vietnam through relocation of manufacturing out of China, the overall damage to the region would be substantial over the longer term.
In this publication we try to look beyond the hype and the headlines. Despite much of the media coverage signalling challenges for the global economy, overall, as we predicted in edition four, was an economic success story throughout the region. As usual, markets moved more than economies. With global liquidity tightening, financial markets reacted disproportionately to this uncertainty. Stocks and currencies across the region were sold off amid a proliferation of geopolitical concerns, worries about disruptions to supply chains and other risks that were almost impossible to quantify.
In our view, interest rates are likely to continue rising in the US while other major central banks are also likely to cut back on their quantitative easing and financial liquidity will continue to tighten. Even if US-China trade tensions subside, this gap between still-decent economic growth and market performance is expected to continue in the region in The paths they choose will vary, based on factors such as how dependent their own economies are on trade. Both Tokyo and Beijing could provide leadership here. As outlined above, an escalation in trade tensions between US and China would almost certainly cause a slow down for Asia Pacific economies.
But even this dark cloud could have some silver linings.