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    Next Week in Asia – 29 July

    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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    China-US trade data to show resilience, despite tensions

    Upcoming data will provide an important indication as to whether the resilience in China-US trade is continuing. In June, China’s trade surplus with the US grew to US$32.58 billion, with its overall trade surplus at US$51.53bn – the largest since January. Increases in the bilateral trade surplus stand in contrast to the current political rhetoric. US Deputy Secretary of State, Wendy Sherman, met with State Councilor and Foreign Minister Wang Yi on 26 July, where tensions were evident. Minister Wang Yi was quoted as saying, “it requires serious consideration for the US side to make correct choices as to whether the bilateral ties will head to confrontation or improvement.” The two countries agreed to continue dialogue. In the run up to the meeting, China imposed sanctions on a number of American individuals, including former US Commerce Secretary, Wilbur Ross. This follows the US sanctioning Chinese officials in Hong Kong.


    India’s Reserve Bank will use its firepower to lift economy

    The Reserve Bank of India (RBI) is expected to keep its policy rate at an accommodative level at its upcoming meeting. The recent increase in India’s quantitative easing programme, along with a subsiding of COVID19 cases, will help keep rates low and supportive of economic growth. The RBI has also noted that the growing level of its foreign exchange reserves will be an important policy tool to manage – and cushion against – any global spillovers. Looking ahead, monetary conditions are of particular importance in determining India’s investment climate, both for foreign and for domestic firms. Additionally, any increase in the RBI’s promotion of green finance, and green bond issuance in particular, would foster a more sustainable growth trajectory as the economy recovers. One way of doing this is for the RBI to tackle the cost of issuing green bonds, which remains high.


    Asia’s central bank reserves expected to climb higher

    Upcoming FX reserve data are likely to show that Asian central banks have continued to build up their precautionary reserves. The data are likely to reveal further rises in China (US$3.2tr in June), Japan (US$1.38tr), India (US$611bn), South Korea (US$441.2bn) and Indonesia (US$137bn). Of particular interest will be the trajectory of China’s reserves in underpinning its capacity to cushion its economy. China’s reserve position is at a crossroads: if reserves grow in line with the (negative) average growth rate of the past five years, its reserves will start to trend lower. However, if reserves grow in line with the past decade, or even the long-term trend of the past two decades, China’s reserves are likely to eventually surpass the US$4tr mark (see figure). Upcoming data will also include FX reserves from India, the Philippines, Thailand, Korea and Japan. Of particular interest will be to see the degree to which reserves continued to climb in India.


    Thailand’s capacity for further stimulus: watch Bank of Thailand

    There are significant downside risks to Thailand’s growth trajectory; as Southeast Asia’s second-largest economy, this is of particular significance for the region. At its upcoming meeting, the Bank of Thailand (BOT) is likely to keep its policy accomodative. With its main interest rate at 0.50 per cent, there is limited scope for further reductions. And at 1.8 per cent, the BOT’s growth projection for 2021 is low and significantly lower than many of Thailand’s neighbouring economies. Given the large output gap between actual and potential growth, there is scope for unconventional monetary measures. This has also been echoed by the International Monetary Fund. Ultimately, a multipronged monetary policy is needed to address Thailand’s economic scarring from the crisis. Such measures should include the provision of liquidity to support private sector-led investment.

    Delta variant to continue to disrupt activity in Asia

    The COVID19 Delta variant is likely to continue to disrupt economic activity. Increases in (already elevated) shipping costs are also likely to be seen in the upcoming raft of Asia’s purchasing managers’ indices (PMIs), that tend to give a good lead indication for economic activity. For the most part, they are likely to show weakness. China’s PMI will likely continue to show signs of deterioration, with supply bottle necks a continuing theme. Malaysia and Vietnam, that saw sharp drops to 39.1 and to 44.1 respectively in June – have indices that denote contraction. This could have continued in July. India’s PMI too is likely to show another contractionary reading from June’s 48.1. Export orders may buck this trend and show strength in a number of economies. A key silver lining in the PMI data is likely to be found in South Korea’s report following its recently stronger-than-expected GDP report.

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