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    Next Week in Asia – 22 July 2021

    Published On: 21 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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    US defense secretary to visit Indo-Pacific 

    The US is seeking to shore up ties with the lower-middle income economies in Southeast Asia as part of its Indo-Pacific strategy, with US Defense Secretary Lloyd Austin visiting Singapore, Vietnam and the Philippines next week. The Biden Administration has emphasised the importance of working multilaterally in terms of meeting the perceived challenges of China in the region, particularly in the South China Sea, and Austin’s trip could be seen as an attempt to revive relations with key partners. It is likely that US diplomatic efforts in the Indo-Pacific will go beyond the provision of public goods, such as COVID-19 vaccine supply; within ASEAN, the US must throw more weight behind its economic strategy in order to build its regional political leverage.


    Asia’s manufacturing sector: watch for competitive devaluations

    Asia’s manufacturing sector has proved to be a strong spot within the recent global economic upturn, driven in large part by export growth. As a new wave of COVID-19 infections takes hold, policymakers’ efforts to boost competitiveness could take centre stage. The upcoming data from Singapore, Thailand, South Korea and Japan could show a growth deceleration in industrial output. Key to watch will be any beggar-thy-neighbour policies – currency devaluation in order to spur competitiveness – which may become more prevalent and would be unwelcome. ASEAN economies need to foster economic transformation, and stronger, not cheaper, currencies enable this through increasing import capacity for inputs to produce higher value-added goods. Upcoming data in China could show intermittent weakness in industrial profits as well as in advance July readings for its purchasing managers’ indices.


    US Federal Reserve policy and its Asia spillover

    US monetary policy matters for Asia. Typically, its impact spills over to Asia’s economies through the co-movement of regional interest rates with the US – and particularly through the long-term borrowing costs that are key for economic activity. Increasingly, China’s monetary policy also has a regional impact: in normal or ‘non-crisis’ periods, China’s influence on Asian stock markets rises to a level comparable with that of the United States, although spillovers from the US are stronger in periods of stress, according to the Bank for International Settlements. The upcoming Federal Open Market Committee meeting will be important in that further signals of tighter policy could fuel greater risk aversion and translate into higher borrowing costs for a number of Asian economies. This is likely to be short-lived given that renewed growth concerns (owing to the spread of the COVID-19 Delta variant) are translating into lower borrowing costs.


    Watch financial markets: COVID-19 clusters could spur further volatility

    Concerns over the spread of the COVID-19 Delta variant, and its impact on growth, will likely continue to weigh on financial market sentiment. This could include protracted weakness in Asia’s equity markets and a continuation of lower bond yields. In Asia in particular, this will stem in large part from heightened growth concerns linked to the new wave of COVID-19 clusters: Indonesia is thought to be a new epicentre and South Korea, Malaysia and Thailand have seen spikes in infections. Risk aversion and uncertainty could filter through into the real sectors of the economies leading to restrained lending, investment spending and domestic demand. Japan’s Nikkei 225, Hong Kong’s Hang Seng, and South Korea’s Kospi are all likely to see further volatility and multi-month lows. In addition, regulatory tension relating to the hacking of Microsoft Exchange could exacerbate risk aversion.


    Despite risks, South Korea to show silver linings in its growth

    A number of upcoming reports, which will include advance estimates of GDP for the second quarter, retail sales, manufacturing production and trade figures, are likely to indicate continued strength in South Korea’s economy. The Asian Development Bank (ADB) recently revised up its growth outlook for the South Korean economy for 2021, to four per cent (from 3.5 per cent), stemming in large part from the country’s stronger than expected export and investment growth. This stands in contrast to the ADB’s growth downgrades for the region’s other economies. The recent rise in COVID-19 cases, due in part to the more contagious Delta variant, has emerged as major downside risks. In its latest economic assessment, South Korea’s government stated that rising virus cases could restrain improvement in domestic demand. Despite this, growth is likely to be underpinned by broad strength in both the domestic economy and in net exports.