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 could grapple with slowing activity and soaring prices
In the week ahead, the publication of China’s foreign exchange reserves for the month of September will be of interest given signs of slowdown in the domestic economy. It is clear that the pace of economic growth decelerated at the start of autumn – both in China and in Asia more broadly. Looking ahead, the prospect of intermittent lockdown measures related to the COVID-19 crisis, and continued power outages (currently reported in factories in 20 out of China’s 31 provinces) could impact China’s economy significantly. The slowdown in economic activity does not augur well for China’s foreign exchange position. Next week’s composite PMI index is also likely to have remained in contraction territory, indicating a negative trend for the actual ‘hard’ activity data. With energy prices soaring, producer price inflation following suit, and activity decelerating, financial instability (in the form of exchange rate depreciation) may be exacerbated by developments relating to China’s real estate sector. This could mean that its FX reserves are used strategically, and drawn down, to cushion the economy against any unexpected shocks.
Expect US politics – and borrowing costs – to take on increased importance
US borrowing costs, and the political economy that underpins them, will take on increased importance in the week ahead, particularly if US interest rates edge higher on the back of positive US economic news. This could spur spill-over into Asia’s cost of borrowing. Transmission from US developments into other countries’ asset prices is often high – particularly in countries that tend to be seen as higher risk. Next week’s US non-farm payroll employment report is expected to show strength in the US labour market and could be one such catalyst. Additionally, domestic US politics will be important. Although a US debt deal has been reached to suspend the US debt limit to allow the government to continue to effectively function until early December, renewed risk on this front is likely. US Treasury Secretary Janet Yellen informed US House Speaker Nancy Pelosi that failure to suspend or raise the debt limit would lead to the first-ever US default, which would significantly impact US borrowing costs and, inevitably, have spill-over into Asia’s asset prices, given the high level of financial transmission during periods of risk aversion.
Economic stabilisation key ahead of Japan’s November election
A raft of Japan’s economic reports will be released next week that will provide a clearer indication of the state of the domestic economy at the start of Autumn – following both the Olympics and Japan’s recent wave of COVID-19 infections. Japan’s foreign exchange reserves, Tokyo consumer price indices, household spending and average earnings data will be essential – particularly the latter three, given the country’s domestic disinflationary pressures. With the most recent COVID-19 wave having subsided and the country’s state of emergency due to be lifted, the economy is likely to show some stabilisation to the end of this year. Bank of Japan governor Haruhiko Kuroda stated that Japan’s economy will continue to recover and could even reach pre-pandemic levels by the end of 2021 or early in 2022. With the crisis increasingly under control, economic stabilisation will be of primary importance ahead of Japan’s upcoming general election. Fumio Kishida, Japan’s former foreign minister, is expected to become prime minister after winning the ruling Liberal Democratic party’s runoff. Japan’s general election is expected to take place in the first half of November.
India to show economic resilience despite rising risks
The Reserve Bank of India’s (RBI) monetary policy meeting is due in the week ahead. As with a number of emerging economies, the RBI will continue to grapple with increasing inflation pressures and intermittent risks to its economic outlook. Despite the economic impacts from the COVID-19 crisis, India is expected to be one of the fastest growing economies in 2021. Chief Economic Adviser K.V. Subramanian recently commented that India’s economy will register over seven per cent annual growth during this decade given India’s economic fundamentals (such as inward FDI). Of particular interest in the coming week’s monetary policy meeting will be the RBI’s inflation assessment in light of rapidly increasing energy prices and – secondly – its analysis of financial spill-over effects from the US Federal Reserve – potentially indicating a tapering of its easy monetary policy. Of late, India’s rupee has weakened amid risk aversion in markets stemming from the prospect of tighter US monetary policy. The RBI has been known to intervene in India’s currency market and may do so again.
Abu Dhabi’s planned IPO to be one of UAE’s biggest
Abu Dhabi National Oil Company (ADNOC) is expected to sell shares in its drilling unit next week, which would constitute one of the UAE’s largest initial public offerings (IPO). ADNOC’s listing, expected on 3 October, could also be close to the offer period for ACWA power, which is expected to be Saudi Arabia’s largest IPO since its listing of Aramco. It is reported that ADNOC may also possibly list its joint fertilizer venture (with Dutch Firm OCI NV, Fertiglobe) in October as well. Abu Dhabi holds most of the oil resources in the UAE and is proactively employing its energy assets to attract inward investment with a view to fostering economic transformation into its non-oil sectors. The UAE is the third-biggest producer in the Organization of Petroleum Exporting Countries, behind Saudi Arabia and Iraq. Looking ahead, in all likelihood, the UAE’s strategy will remain anchored in oil-related revenue for decades to come though there will continue to be an increasing government strategy to further develop its technology, manufacturing and tourism sectors.