Welcome to our new-look Week in Asia briefing on trade, investment and policy developments across the region. ‘Next Week in Asia’ will bring you forward-looking analysis and insights from the Asia House Research and Advisory team.
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17 JUNE 2021
China in focus as the People’s Bank of China meets
China will continue to take centre stage following increased tensions in some of its multilateral relationships in relation to the G7 and NATO statements in the past week. Domestically, Chinese policymakers will be largely focused on both the health of the economy and domestic financial stability. To safeguard growth, there is unlikely to be any tightening of policy at the upcoming People’s Bank of China meeting. Credit allocation is likely to continue to be targeted towards the re-balancing in China’s growth, away from the property sector. Support is also likely to be focused on SMEs that are encountering difficulties in the wake of the economic effects of the pandemic. More fundamentally, China has – and will continue to employ – multiple mechanisms to support growth, and a further intervention to weaken the renminbi (following the recent intervention in early June) cannot be ruled out. If both China’s growth and inflation prospects continue to edge higher, it is likely that the renminbi will test policymakers again.
Dr Wang Huiyao, Founder and President of the Center for China and Globalization, will brief Asia House Corporate Members on China’s economic outlook on 22 June. Find out more.
Asia’s inflation threat is low, but global fears could impact firms
Globally, inflation has accelerated. Asia’s inflation threat remains muted in comparison. However, this may shift when it comes to the longer term, given pipeline inflation pressures in Asia. China’s annual producer price inflation (PPI) accelerated to nine per cent in May, driven by higher commodity prices; South Korea’s upcoming report may reveal the same. On the consumer side, it will be worth watching for surprises from the Philippines (where transport prices surged 18 per cent annually in the previous report). Hong Kong, Singapore, and Japan will also release their data – as well as Malaysia, which will be of interest following its inflation rate more than doubling from 1.8 per cent year-on-year in March to 4.6 per cent in April. This was driven by a 3.5 per cent jump in housing and utility prices following months of deflationary readings. The biggest risk to Asia’s economies is higher inflation expectations in developed markets pushing up long-term interest rates, which could raise domestic borrowing costs.
Central banks: watch Thailand and the Philippines for unconventional policy
With global growth recovering, there is increasing attention on whether and how monetary policy easing will be reversed; it might occur through a lower level of asset purchases, as has been hinted at in the US. In Asia, there is little chance of such a reversal. Negative output gaps are large, and the risks of regional COVID-19 outbreaks persist. The central banks of Thailand and the Philippines are due to meet and are both contending with economic scarring from the crisis. The Bank of Thailand (BOT) will continue to flag these risks, particularly given its low vaccination rates and its vulnerability to shocks given the economy’s openness. With its policy rate low, and uneven credit availability for SMEs, there is scope for unconventional monetary easing. The same applies to the Philippines where the 2020 GDP contraction was deeper than the 1997-98 crisis. The central bank’s measures have amounted to 12 per cent of GDP, and yet bank lending continues to contract, suggesting that more aggressive easing is needed.
Oil prices continue to climb ahead of OPEC meeting
The Organization of the Petroleum Exporting Countries (OPEC) will meet on 24 June, preceding the larger ministerial OPEC+ meeting on 1 July. A key question is whether, and the degree to which, any production changes will be sanctioned given the continued ascent in oil prices. As global growth recovers from the COVID-19 crisis, emerging and developing economies (and China and India in particular) are expected to drive the demand for oil, including in OPEC’s own forecasts. In light of this, pressure to reverse OPEC production cuts remains high. The International Energy Agency’s recent monthly oil report reiterated this, stating that oil demand was set to return to pre-pandemic levels quicker than previously expected. Despite the expected rise in demand, there is uncertainty as to whether production cuts will be reversed amid the possible return of Iranian oil production and economies’ energy transitions.
Global activity indicators: uneven recovery with some strong spots
The global economic recovery continues to be uneven across regions, countries, and sectors. These divergences are likely to persist with the lead activity indicators for the month of June. Asia’s global purchasing managers’ indices (PMIs) – starting with Japan – will indicate that activity in manufacturing remained stronger than in services, which largely continues to be impacted by COVID-19 related lockdown restrictions. This is particularly true for the Southeast Asian economies. Globally, the manufacturing PMI is well above the 50-level (at 56) indicating a resilient outlook. Japan’s data show this notable divergence – although manufacturing is expanding (53), Japan’s composite index, which includes the service sector, is in contraction at 48.8. Looking ahead, the rebound in oil and commodity prices could mean that manufacturing will be supported. However, with restricted lending and access to finance for a number of SMEs in several emerging and developing economies, it is likely that initial indications for the June activity data is not one of uniform strength.
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