The world will be watching China as a driver of global growth in 2021. The nation is in a strong place as it approaches the hundredth anniversary of the Communist Party of China’s founding, with a firm handle on the coronavirus, a healthy growth rebound expected in 2021, and the likelihood for reduced US-China trade uncertainties under a Biden presidency. While we see some bright spots in other parts of Asia, prospects are generally more muted, solidifying China’s position as the key to growth in the region and globally.
Asia’s largest country was the first to impose targeted lockdown restrictions due to the Covid-19 outbreak and was likewise the first to post signs of recovery, despite a much more modest fiscal and monetary policy response (thanks to already sky-high debt levels) compared to its major economic peers. The People’s Bank of China cut its main policy rate, the five-year loan prime rate, by just 15 basis points (bps) this year, a fraction of the Federal Reserve’s 150-bp cut, and Chinese policymakers announced a US$724 billion Covid-19 fiscal package, which pales in comparison to the $2.3 trillion CARES Act announced in the US (with more stimulus likely to come).1
China’s virus containment efforts have largely succeeded, with official numbers indicating a more or less flat daily case curve since April. Furthermore, alternative activity indicators and mobility indices paint a consistent picture of China humming close to pre-Covid levels during the second half of 2020. As a result, China is one of the very few economies, and clearly the largest, likely to post GDP in positive territory compared to pre-Covid levels, with a healthy rebound expected in 2021 driven by the opening-up of credit channels and recovery in global growth. We also expect monetary policy to remain dovish as the world continues to recover from the Covid-related shock. Credit growth, China’s preferred stimulus lever, will likely remain elevated in 2021, providing an overall tailwind for growth.
Source: Macrobond, Bloomberg, PineBridge Investments Calculations as of 11 November 2020
Source: Macrobond, Bloomberg, PineBridge Investments Calculations as of 11 November 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, forecasts and forward-looking statements presented above are valid only as of the date indicated and are subject to change.
In economic policy discussions during China’s Fifth Plenum, one phrase dominated party doctrine: “Dual Circulation,” or the process of promoting both internal and external commerce. While on its face the new process seems no different from other growth-promoting policies, we believe it could indicate a greater shift inward and a call for more capital expenditures. The updated guidelines for the 14th Five Year Plan, released after the Fifth Plenum, highlighted new goals, including modernizing China’s supply chain; deepening economic reforms to achieve a high-quality socialist market economy system; supporting domestic consumption; and promoting “green” development. The not-so-subtle implication for policy is to expect an acceleration in research and development (R&D) spending as a share of GDP, potentially outstripping the US in the next few years when adjusted for purchasing power parity (PPP). Also, markets should expect higher infrastructure spending amidst a nationwide 5G rollout, along with more government support for certain domestic companies exiled from the US tech sphere to build a “not made in America” supply chain by 2022.
Source: Macrobond, Bloomberg, PineBridge Investments Calculations as of 11 November 2020 . For illustrative purposes only. We are not soliciting or recommending any action based on this material.
In 2018 and 2019, trade tensions escalated between the world's two largest economies. President Trump’s fixation on the US trade deficit with China and perceived “unfair” practices led to a tit-for-tat trade war that upended the global trade environment and ushered in sustained policy uncertainty. Under Biden, we would expect a more predictable trade relationship with China and engagement with other economic partners to develop a multilateral trade policy. We may also see more collaboration between the US and China on issues like the environment, where the latter has announced a goal of carbon-neutrality by 2060. That said, we expect some degree of tension to persist on both trade and human rights issues: The perception that China is a geopolitical rival is bipartisan.
Prime Minister Abe captured the attention of financial markets not only for his sweeping set of economic policies, dubbed “Abenomics,” but also because he provided a degree of stability as the longest-serving Japanese prime minister in modern history – a balm for the post-Koizumi era, characterized by a series of prime ministers lasting a year or two at most. Abe’s sudden departure in September due to illness left the country pondering what a post-Abe and post-Abenomics Japan might look like. The answer came in the form of Yoshide Suga, a close ally of Prime Minister Abe who skews a bit more conventional and populist.
For Mr. Suga, the challenge will be to revive an already sluggish economy placed under further pressure by the Covid-19 outbreak. Marginal initiatives like the establishment of a Digital Agency and continued promotion of robotics, an area where Japan leads globally, have the potential to boost Japan’s productivity despite unfavorable demographic trends. We expect Japan to continue enticing foreign investment and tourism as sources of growth. Still, much of that is dependent on the coronavirus trajectory and the development of an effective vaccine.
On the monetary policy side, the Bank of Japan may face challenges finding new ways to boost the economy in 2021. Even before the Covid-19 outbreak, the central bank had engaged in a “kitchen sink” approach to monetary policy stimulus – implementing negative interest rates, which it later seemed to regret, yield curve control, and a broad asset purchase program that included government bonds, corporate bonds, and exchange-traded funds (ETFs) – and only marginally expanded its program in the face of the virus. With new challenges, including the yen’s appreciation to its strongest point in years against the US dollar, and inflation trending even further away from the bank’s 2%-plus inflation target, the bank may have to find novel ways to achieve its monetary policy goals.
Source: Macrobond, Bloomberg, PineBridge Investments Calculations as of 11 November 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Within Emerging Asia, we expect the recovery to be more muted as it enters a more mechanical phase in 2021.
In India, the Covid-19 outbreak has made the divergence between the formal and informal sectors even more pronounced. Policymakers at the Reserve Bank of India find themselves between a rock and a hard place, with concerns about a slower economy on one hand and the potential to stoke above-target inflation and a depreciating currency on the other. A higher debt load from Covid-related spending might reduce the likelihood of another fiscal package in the intermediate term. Therefore, the Modi administration should continue with reforms to unlock India’s growth potential. We’ve seen some encouraging signs already this year with the government’s steps to streamline the agricultural sector, but more can be done on the corporate side to sustain foreign direct investment flows, another tailwind for growth.
In other parts of Asia, the challenges are political. Thailand’s large-scale political unrest amidst the pandemic is likely contributing to a deeper recession for 2020 and slowing the country’s growth momentum going into 2021. Likewise, in Malaysia, where Covid-related lockdowns persist, palace intrigue also continues as political rivals vie for the prime minister seat. Vietnam remains a relative bright spot in the region, benefiting from the containment of Covid-19 cases and effects of the US-China trade war, likely joining China with a positive GDP print for 2020 and a rebound in 2021. After years of lackluster growth rates in Indonesia, we expect policy easing to continue in 2021 as the Jokowi government implements its promised ambitious labor, land, and tax reforms to make the nation more competitive for business, eschewing fiscal discipline. The role of Bank Indonesia may change more rapidly in 2021 as the parliament moves for more government oversight over the central bank.
We expect ESG initiatives in Asia to accelerate in 2021. From an environmental perspective, we believe much can be done. China and India account for nearly 90% of the 200 cities in the world with the highest pollution,2 and Indonesia announced it would move its capital from Jakarta to Java given the uncomfortable reality that much of the city is sinking, with models predicting up to 95% of the city could be submerged by 2050.3
This year, Japan and China, two of the region’s largest economies, announced plans to achieve carbon neutrality within this century as the effects of climate change become more severe. China has also championed electric vehicles by handing out government rebates and has pledged that all new cars sold by 2035 will be “eco friendly.”4 As part of its Fifth Plenum, China has also announced a revival of its environmental initiatives, which had been on the back burner in 2020.
From a governance perspective, Japan and India are two countries to watch. Efforts to change the composition of boardrooms were a pillar of Abenomics and will likely continue under Prime Minister Suga, who has hinted at reforms for the telecom and banking sectors. India has become a more competitive economy under Prime Minister Modi, according to the World Bank, but has lost steam in the past three years. In order “not to let a good crisis go to waste” (as US political strategist Rahm Emanuel has said), Modi could begin to implement badly needed reforms of India’s labor market and strengthen legal protections for many of its small businesses under the guise of pandemic relief.
1 Source: IMF, “Policy Responses to COVID19,” as of 5 November 2020.
2 Source: Times of India, “China Shows How India Can Cut Pollution Faster,” 28 February 2020.
3 Source: Wired, “Jakarta is sinking,” 5 February 2019.
4 Source: Nikkei Asia, “China plans to phase out conventional gas-burning cars by 2035,” 27 October 2020.
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As of 31 March 2020