What then are the big questions facing Asia this year? Here are four, ranging through interest and currency rates to exports and politics.
China’s debt splurge continues and the central bank has increased interest rates this year, raising concern that more aggressive moves are in store.
But that appears unlikely. Tighter financial conditions will likely affect growth in due course, but the housing market remains the engine of China’s economy. Higher interest rates will weigh on property, and already transactions in top cities have declined sharply, which will likely hit growth.
So this doesn’t look like the start of China’s big tightening cycle. In a year of political transition, stability seems to be the priority. China’s economy is too credit driven, and there are too many refinancing needs coming down the pipeline, to slam on the brakes.
A stronger dollar, especially a sudden move, would tighten financial conditions. And as growth in many Asian economies is highly credit intensive, this quickly affects final demand. The dollar strength in late 2016 led to substantial capital outflows and renewed strength would only compile the pressure.
The common assumption is that a stronger dollar is good for exporters and thus boosts growth in the region. The recent tick-up in shipments may well have reassured investors that currency adjustments have prompted a swift rebalancing of Asian growth away from local to external demand.
However, we doubt that this improvement in exports has legs. Not only does the recent evidence give no such hint, the region is apparently suffering from a structural trade problem and global trade has started to gum up amid growing protectionism. That said, if export volumes did rebound, it would get much of Asia out of its growth pickle.
There are elections this year, local or national, in India, Indonesia, Korea, New Zealand, and possibly Malaysia. These could provide a catalyst for reforms – or the opposite. We remain mildly optimistic in most cases.
But the big political event is China’s leadership transition. Stability will probably be preferred over bold action. That might be regrettable, given the reform agenda looming ahead, but stability would be no bad thing for those who’ve tasted a little too much volatility of late.
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