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    Next Week in Asia – 1 July 2021

    Published On: 1 July 2021

    Next Week in Asia is the Asia House weekly briefing on key trade, investment, and policy issues to watch across Asia in the week ahead, with analysis and views from our Research and Advisory team.

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    Asia’s policy makers build ‘war chest’ of reserves

    Central banks, including in Asia, are likely building up their precautionary reserves in anticipation of higher US interest rates (and the associated US dollar strength at the expense of local currencies). Emerging Asia’s central bank foreign exchange reserves are at a record high of US$5.8 trillion, and a record US$2.6 trillion excluding China. Reports released in the upcoming week are likely to reveal further rises in China (US$3.2 trillion in May), Japan (US$1.4 trillion), and India (US$608 billion). Following S&P’s affirming of China’s debt ratings, focus remains on the highly indebted non-government sector. And yet, an acceleration in foreign portfolio inflows and strength in exports will support the RMB and China’s reserve position. Elsewhere, the Reserve Bank of India’s foreign exchange reserves rose to a record high at the latest reading, making India the fifth largest holder of reserves; of interest will be whether further rises are recorded, given India’s economic slowdown. Indonesia and South Korea’s foreign exchange reserves, too, are at, or near, record highs – the latter at an all-time high of US$457 billion.

    Finance Ministers and Central Bank Governors to meet

    Under the Italian presidency, the G20 has focused on three interconnected pillars: People, Planet, and Prosperity. The third Finance Ministers and Central Bank Governors Meeting will take place in Venice 9-10 July and is likely to build consensus around specific shared initiatives – predominantly for increased multilateralism – in the run up to the October summit in Rome, where the heads of state typically endorse ministers’ key outcomes. US Treasury Secretary Janet L. Yellen will attend next week’s meetings in Venice, and will likely continue to reinforce the US commitment to multilateralism, the US global tax initiative, an inclusive economic recovery, and global health. Secretary Yellen recently referred to the US global tax initiative on 24 June, stating that she intends to seek support for a minimum corporate tax of at least 15 per cent. Following the finance ministers’ and central bank governors’ meeting, the Venice International Conference on Climate will take place on 11 July with G20 counterparts, thought leaders, private sector representatives, and heads of international organisations discussing the role of global policies and private sector finance in addressing climate change.

    Asia recovery data expected to reflect Delta variant disruption

    The COVID-19 Delta variant is likely to continue to impact economic activity as an increasing number of cases are reported. Although overall cases are low in China, ports in its South East region – its busiest trading hub – continue to see significant delays in waiting times and costs. Waiting times for vessels at the Yantian International Container Terminal in Shenzhen have jumped from an average waiting time of 0.5 days to 16 days, according to reports. That, in turn, is causing increases in already-high shipping costs. The China Composite Purchasing Managers’ Index (PMI) is due to be released and, although it is in expansionary territory above the 50-mark, it is showing some signs of having corrected lower following the four-month high of 54.7 in April. Supply bottle necks may have impacted the data. Unlike China, India has a higher number of Delta variant COVID-19 cases, the second highest after the UK. India’s economy is likely to continue to feel the impact of the crisis and its composite PMI will remain in contraction territory, due in part to the impact of lockdown measures. Although India was expected to be the fastest growing economy in 2021, expectations are due to be revised lower.

    Dr Krishnamurthy Subramanian, Chief Economic Adviser to the Government of India, will brief Asia House Corporate Members on the country’s economic outlook on 8 July. Find out more.

    The PBOC to continue to monitor China’s inflation trends

    China’s pipeline inflation pressures are being driven by both commodity price jumps and supply side bottlenecks. At nine per cent in May, China’s producer price inflation is likely to have remained high in June. It has significantly outpaced consumer price inflation, which registered at 1.3 per cent in May. It is likely that the People’s Bank of China (PBOC) is monitoring this gap to see the degree to which there will be pass-through from pipeline producer price inflation to consumer prices – something which is unlikely given that the source of the pressure is likely to be transitory. Of particular importance to policymakers will be the detailed splits of the consumer price report, such as recent developments in food price inflation (which is slightly above zero) and the price of basic necessities. Signs of pent-up demand will mean that the PBOC might change its assessment of the inflation outlook and deem pass-through into consumer inflation expectations more likely, possibly shifting its policy stance.

    Bank Negara Malaysia meets: it should revisit unconventional policy tools

    As of the first quarter of 2021, Malaysia’s economy was still in contraction. Bank Negara Malaysia (BNM) faces an unfortunate mix of weak growth and accelerating inflation, which at 4.4 per cent is near April’s multi-year high of 4.7 per cent. As with other policymakers, BNM is likely to look through the recent spike in inflation. Malaysia’s acceleration was driven, in part, by transport costs that registered a 26 per cent increase in May. Growth could be supported by the manufacturing sector (particularly in the electrical and electronics sector) and in oil and gas. And yet, if Malaysia’s recovery fails to take hold amid signs of some economic scarring, BNM should reconsider unconventional policy and rethink its past hesitation to undertake large-scale bond purchases. This could complement the government’s recently-announced stimulus package worth RM150 billion (US$36.2 billion) to mitigate the impact of the continued national lockdown. Prime Minister Muhyiddin Yassin stated that the economic recovery and people protection package aims to alleviate financial difficulties from COVID-19.

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