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09 Oct 2013

Asia is saved by the bell

Frederic Neumann

by Frederic Neumann

Co-Head of Asian Economic Research, HSBC

Asia is saved by the bell

Growth in the Philippines is beginning to rival the rate seen in China

Asian markets reeled in mid-2013 as China’s interbank-rate spike shook confidence and talk that the US Federal Reserve would taper monetary easing caused currencies to tumble. But Washington delayed and China has regained its footing, with liquidity soaring and growth perking up. Even Indonesia and India, Asia’s hardest-pressed markets, have held their own. However, it is only partly true to say this wobble and rebound demonstrate the region’s fundamental strength and resilience.

This is simply a window of opportunity for Asian officials to apply strategies for the region’s long-term success

The Fed’s delay to tapering bought time. China’s fine-tuning is merely a hold-over pending more comprehensive reforms. This is simply a window of opportunity – a short break from inevitable further turmoil – for Asian officials to apply strategies for the region’s long-term success.

Asia’s giants – Japan, China and India – probably require the most urgent reforms. These stretch from financial deregulation to cutting subsidies and are not easy to deliver, politically or otherwise. Without them, however, growth will again fizzle. Elsewhere in Asia, investors worry about the debt build-up and fading efficiency gains.

For now, most of Asia should enjoy steady growth. Northeast Asia looks especially strong, being less distracted by financial turbulence and more exposed to the strengthening global industrial cycle. We have raised our 2013 GDP forecast for China from 7.4 per cent to 7.7 per cent and any slowing in 2014 will be slight.

Reforms can cut two ways, restraining growth initially then raising it later. Much has been made about Japan’s resurging competitiveness: the tumbling yen certainly caused concerns among competitors but, so far, Korea and Taiwan are holding their own because Japanese firms remain shackled by sky-high energy costs and the preference in some markets, not least China, for other countries’ branded goods.

Even though Japan’s exports remain lacklustre, its economy grew almost 4 per cent in the first half of 2013 – faster than any other advanced economy. However, that cannot continue for long without additional stimulus and ambitious structural reform. More stimulus can be delivered in short order, but reform will increasingly concern investors as they ponder its sustainability.

Although India and Indonesia seem over the worst, growth will probably still slow, especially in India. Both nations’ central banks need to be ready to push rates higher if global volatility returns but their dilemma will be how to avoid restraining growth.

Elsewhere, growth in the Philippines is beginning to rival the rate seen in China. Malaysia and Thailand, like Hong Kong and Singapore, will likely maintain solid, if not stellar, growth. But debt in all four is high with a fading appetite for adding even more, so growth may accelerate only gently over the coming year.

Australia’s growth has fallen below trend as the mining investment boom fades, though a buoyant housing market and new government may allow business confidence to rise, causing growth to pick up in 2014. However, New Zealand is benefitting from a booming housing market and post-earthquakes reconstruction.

This research was first published on 3 October 2013.
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