Sunday, April 5, 2020
Home Blog

Will COVID-19 bring recession and debt shock to developing Asia?

A man walks out from a business building in Tokyo. Sentiment among Japanese manufacturers improved for a second straight month and is expected to turn into a positive reading in the coming few months, a Reuters poll showed, providing some evidence that the economy is crawling out of a mild recession. 24 January, 2013 (Photo: Reuters/Toru Hanai).

Author: Ganeshan Wignaraja, Lakshman Kadirgamar Institute

Developing Asia is famous for engineering V-shaped recoveries following the 1997 Asian financial crisis and the 2008 global financial crisis, as well as emerging as a key engine of global growth. The severity of the COVID-19 pandemic has sparked concerns about what shape global growth recovery will take and what it means for developing Asia.

As of 1 April, China accounted for 9.6 per cent of global cases while South Asia accounts for 0.43 per cent. The rapid transmission of the infection is linked to the globalisation of the world economy and the advent of global travel. It has triggered a public health emergency and an economic shock. Stock markets across Asia have tumbled and China-centred global supply chains are collapsing. Travel bans and lockdowns have disrupted daily life. Unemployment and income inequality are rising.

Developing Asia grew at 5.6 per cent in 2019 and the International Monetary Fund (IMF) projected that this figure would uptick to 5.8 per cent in 2020. It is premature to assess the full economic impact of COVID-19 on developing Asia as economic data is still lacking and forecasting models are not adequately specified to analyse the disruption from the pandemic. The IMF will update its forecasts during the virtual Spring Meetings this year.

Projections made in a study on the medium-term outlook on developing Asia’s growth and the prospects for middle-income countries are being updated using leading indicators (such as the manufacturing purchasing managers index) in an attempt to predict significant changes in economic activity.

This updating exercise suggests two economic scenarios for developing Asia and the world, with the depth of the downturn depending on the effectiveness in containing COVID-19.

The first scenario is a short outbreak and a limited economic impact on developing Asia. The spread of COVID-19 is checked within a few months through lockdowns, social distancing, virus testing, quarantine and medical treatment. A vaccine is available ahead of schedule. Developing Asia’s growth could be between 4–4.5 per cent in 2020. This is above expected global growth of 2.3–2.5 per cent. An upturn in Asia could be likely in 2021. Yet Asia would still fall into recession as defined as two consecutive quarters of decline in a country’s real gross domestic product (GDP).

The second scenario is a long outbreak and a prolonged economic impact on developing Asia. In this scenario, COVID-19 continues to spread rapidly in Asia, containment measures are only partially successful, new mutations could bring a second wave and vaccine development takes longer than expected. Developing Asia’s growth may fall to 2–2.5 per cent in 2020 and remain sluggish in 2021. This is worse than the bottoming of Asian growth to 2.8 per cent during the 1997 Asian financial crisis. Meanwhile, global growth could slip to 1–1.5 per cent in 2020. This would constitute a lengthy recession.

As the pandemic is fast-moving with the epicentre spreading from China to Europe and the United States, the L-shaped second scenario seems more likely than the first. Facing such a bleak outlook, central banks in developing Asia have cut interest rates and are buying assets to support financial markets. Governments are undertaking fiscal stimulus and welfare measures.

Looking at Asian debt dynamics helps to grasp why central banks and governments are intervening. IMF technical work in the early 2000s conservatively suggested prudential benchmarks on public debt of a debt-to-GDP ratio of 60 per cent for developed economies and 40 per cent for developing economies. While not officially endorsed by the IMF, it was thought that breaching these benchmarks would threaten fiscal sustainability.

With a government debt-to-GDP ratio of 58.8 per cent in 2019, developing Asia exceeds the benchmark for developing countries and is approaching that for developed economies. China’s government debt-to-GDP ratio of 60.9 per cent in 2019 is argued to significantly understate the total debt-to-GDP ratio of 303 per cent when corporate and household debt are included. The pandemic has led to concerns about high debt in state-owned enterprises and corporates held in a fragile shadow banking system.

South Asia’s government debt-to-GDP ratio of 66.5 per cent in 2019 also exceeds IMF benchmarks, with outliers Pakistan and Sri Lanka at about 80 per cent. Interestingly, at least in Sri Lanka, there is little evidence of a Chinese ‘debt trap’ due to commercial borrowing for…

Read the rest of this article on East Asia Forum

China Factory Activity Unexpectedly Expands, but Economy Cannot Shake Off Virus Shock

BEIJING—Factory activity in China unexpectedly expanded in March from a collapse the month before, but analysts caution that a durable near-term recovery is far from assured as the global coronavirus crisis knocks foreign demand and threatens a steep economic slump.

China’s official Purchasing Managers’ Index (PMI) rose to 52 in March from a plunge to a record low of 35.7 in February, the National Bureau of Statistics (NBS) said on March 31, above the 50-point mark that separates monthly growth from contraction.

Analysts polled by Reuters had expected the March PMI to come in at 45.0.

The NBS attributed the surprise rebound in PMI to its record low base in February, and cautioned that the readings do not signal a stabilization in economic activity.

That view was echoed by many analysts, who warn of a further period of struggle for China’s businesses and the broader economy due to the rapid spread of the virus across the world, the unprecedented lockdowns in several countries and the almost near certainty of a global recession.

“This does not mean that output is now back to its pre-virus trend. Instead, it simply suggests that economic activity improved modestly relative to February’s dismal showing, but remains well below pre-virus levels,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note to clients.

The pandemic’s sweeping impact on production was underlined in two of Asia’s main export engines, Japan and South Korea. In Japan, industrial output rose at a slower pace in February and factories expect a plunge this month; while production in South Korea contracted the most in 11 years.

Economists are already forecasting a steep contraction in China’s first quarter gross domestic product, with some expecting a year-on-year slump of 9 percent or more—the first such contraction in three decades.

Nie Wen, economist at Shanghai-based Hwabao Trust, said given weak export orders, rising stockpile and soft prices, the underlying issue facing Chinese manufacturers has shifted to a lack of market demand, from production shutdowns…

Source link

Can we stop the protectionist wave?

A worker cycles past containers outside a logistics center near Tianjin Port, in northern China (Photo: REUTERS/Jason Lee).

Author: Gary Clyde Hufbauer and Euijin Jung, PIIE

Globalisation was under threat even before the pandemic. US President Donald Trump set the tone by declaring himself ‘tariff man’, imposing bogus ‘national security’ tariffs on steel and aluminium imports from allies while launching a trade war with China and eviscerating the WTO Appellate Body. But Trump was not alone in attacking the global trading system.

Since the Global Financial Crisis (GFC), G20 leaders have repeatedly promised no new trade restrictions. Yet time and again they have broken their promises. Documented by the Global Trade Alert, each year for the last decade nearly every G20 country has added to its roster of trade restrictions. The pace of new restrictions has gathered steam as the years have rolled by.

Trade is not the only target of anti-globalist policy. Foreign direct investment (FDI) is a necessary complement to supply chains and the delivery of business services and has increasingly faced policy barriers. Starting in 2017, Trump reversed long-standing US policy which embraced both inward and outward FDI. He cast aspersions on US-based multinational corporations (MNCs) investing abroad by ‘outsourcing jobs’, despite contrary evidence. With the Foreign Investment Risk Review Modernization Act of 2018, he then implemented strict reviews on foreign MNCs — particularly Chinese ones— investing in the United States.

But there have been some positive initiatives during the anti-globalist decade (2009–2019). Despite America’s retreat, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was launched, and the Regional Comprehensive Economic Partnership was agreed, even without India. The European Union concluded major trade agreements with Canada and Japan, while China signed pacts with South Korea, and many other bilateral free trade agreements were concluded.

These positive policies were more than offset by negative policies: Brexit, the near-death of and subsequent renaming of NAFTA and Trump’s tepid phase one trade deal with China. Merchandise trade grew at 56 per cent, not much faster than world GDP of 40 per cent, between 2009 and 2018. Annual FDI inflows fell from their peak, from US$1.8 trillion in 2007 to just US$1.3 trillion in 2018.

Then COVID-19 struck. The worrisome rise of protectionism instantly transformed into a global financial rout. Travel came to a standstill as one country after another closed its borders. The European Commission imposed its own ban on exports of vital medical supplies to outsider countries.

Some 54 countries have now imposed export restrictions on medical goods. Lockdowns were quickly adopted by China, South Korea and Italy and are now becoming common among all advanced countries. Enforced social distancing has caused a sharp drop in world GDP during the first and second quarters of 2020. Major banks are forecasting US GDP losses up to 20 per cent in each quarter.

These calamities almost guarantee a surge both in import protection and export controls. China is likely to restore its economic engine before advanced countries. A flood of Chinese exports might trigger a new wave of trade protectionism — antidumping duties, countervailing duties and safeguard actions — even while supply chain shortages and isolating workers limit output elsewhere. Meanwhile, wherever supply shortages erupt, an instant political response will halt exports to keep ‘essential’ goods at home. Supply surpluses may end up closely guarded out of fear. Restrictive measures so far are prioritised to secure medical supplies, but other products cannot be far behind. Soon this practice will become almost as widespread as the virus.

Whatever political purposes might be served by protectionist responses, the economic cost will be greater. We’ve already seen the cost at a local level, as people hoard necessities and ensure supplies are not available for those in dire need.

At a macroeconomic level, trade disruption will foster costly ‘self-sufficiency’ campaigns. Arch-protectionist Peter Navarro has invoked the pandemic to demand that the United States make all medical supplies, pharmaceuticals and other ‘essentials’ at home. Even Emmanuel Macron urged that vital French goods stay in France. Least developed countries with weak healthcare systems will suffer a lack of access to medical supplies.

What can be done? The WTO machinery is too weakened to provide an effective response. Given its questionable track record in keeping markets open following the GFC, the call for…

Source link

Looking beyond Tsai’s big election win

Taiwan President Tsai Ing-wen listens to a speaker in New Taipei City, Taiwan, 26 December 2019 (Photo: REUTERS/Ann Wang).

Author: Gerrit van der Wees, George Mason University and George Washington University

President Tsai Ing-wen and her Democratic Progressive Party’s (DPP) momentous election victory on 11 January 2020 represents a significant turning point for Taiwan. It marks the culmination of a democratic transformation that started with the end of martial law in 1987 and the commencement of democratic reforms by former president Lee Teng-hui in the early 1990s. Since then, the government has changed hands three times. But a persistent public fear exists that a return of the Kuomintang (KMT) will cause Taiwan to backslide away from democracy and towards China.

This happened in 2008 when Ma Ying-jeou regained the presidency. His pro-China stance led to the 2014 Sunflower Student Movement, which changed the political landscape, and led to major defeats for the KMT in the local 2014 and national 2016 elections.

The overwhelming mandate received by President Tsai and her party significantly reduces the danger of such a pro-China agenda. The KMT candidate Han Kuo-yu lost by a margin of almost 20 per cent, demonstrating that the KMT’s pro-China approach is losing ground, especially among younger voters. In its recent search for a new chairman, the candidate elected on 7 March 2020, ‘Johnny’ Chiang Chi-chen, campaigned on the theme that he would ‘bring back’ the young voters. It remains to be seen whether he can bring about changes that appeal to young voters.

As Mark Harrison and Huong Le Thu wrote, ‘Han’s campaign machine was dysfunctional and the KMT was beset by an identity crisis. In the second half of 2019, the protests in Hong Kong left few in Taiwan under the illusion that Beijing would honour any arrangements that would respect any form of autonomy. The younger generation in particular saw an urgency to defend Taiwan’s sovereignty, maintain their democracy and refuse a future like Hong Kong’s’.

The overwhelming victory also represents a clear mandate for President Tsai and her DPP, which — in combination with several smaller parties — holds a majority of 70 seats in the 113-seat Legislative Yuan. Tsai will be able to push through legislation and continue reforms initiated by her government in its first term. These reforms include much-needed judicial reform, transitional justice measures, further economic and industrial reforms, streamlining of the economy and strengthening substantive ties with the United States, Europe, Southeast Asia, India, Japan, Australia and New Zealand.

A question remains: how will Taiwan’s relationship with China develop moving forward? If Beijing continues or intensifies its current approach of pushing Taiwan into a corner, it will increasingly find the United States and other democratic countries in the way. The democratic world has now clearly seen that President Tsai has a broad popular mandate and will be much more supportive of Taiwan and its democracy.

In this context it is important to understand that President Tsai and the DPP are the political descendents of the native Taiwanese democracy movement that brought about Taiwan’s transition to democracy in the 1980s and 1990s. Rowan Callick emphasises that the youth vote focused on issues of identity in place of issues of living standards. The majority of Taiwan now identifies as Taiwanese and not Chinese, with only 13 per cent of the population descended from those who came from mainland China in the 1940s.

This distinction is essential for understanding the Taiwan of today, as the China–Taiwan relationship has until now almost exclusively been cast by media and governments alike in terms of the historical rivalry between Mao Zedong’s People’s Republic of China (PRC) and Chiang Kai-shek’s Republic of China (ROC). This narrative asserts that Taiwan ‘split off’ from China in 1949, and that Taiwan and China were perpetual rivals dating back to the Chinese Civil War.

That may have been the case from the 1950s through the 1980s when Chiang Kai-shek’s government imposed ruthless martial law on the island while still claiming to rule all of China. During that period, ‘Taiwan’ became synonymous with Chiang Kai-shek’s ROC. But after the momentous transition to democracy in the late-1980s and early-1990s, the Taiwanese developed their own narrative, very different from  Mao Zedong’s PRC or Chiang Kai-shek’s ROC — an open and inclusive multi-ethnic identity, emphasising that all people who identify with Taiwan are Taiwanese.

A new and democratic Taiwan should prompt the international…

Read the rest of this article on East Asia Forum

Chinese banks brace for bad debt blowout as coronavirus pande…

Three leading Chinese state-owned banks reported that their non-performing loan ratios had stayed largely stable in 2019 even as the economy slowed amid a trade war with the US.But bank officials and analysts expect their asset quality to worsen this year as the coronavirus strains the financial health of their borrowers.Major Chinese lenders started reporting their full-year results on Friday. Ahead of Friday’s results, Fitch Ratings said in a press release on Thursday that it expects Chinese…

Source link

CCP Virus Devastated China’s Poultry Industry

News Analysis

China’s lockdowns, strict quarantines and travel restrictions on hundreds of millions of its citizens to contain the spread of the CCP virus has devastated domestic chicken production.

The Epoch Times refers to the novel coronavirus, which causes the disease COVID-19, as the CCP (Chinese Communist Party) virus because the CCP’s coverup and mismanagement allowed the virus to spread throughout China and create a global pandemic.

With outbreaks of African swine fever (ASF) since August 2018, which resulted in death or government culling of half of China’s 440 million pig population, domestic chicken consumption was expected to hit 15.96 million metric tons.

Domestic chicken production was forecast to jump from 13.8 million metric tons in 2019 to a record 15.8 million tons in 2020, according to an Aug. 14 report by the USDA Foreign Agricultural Service. With domestic production unable to meet booming demand due to capacity limitations and environmental restrictions, the USDA predicted that China would be forced to lift its bans on chicken product imports.

But four of China’s most important chicken producing provinces, including Hubei that was the epicenter of the outbreak, were issued lockdown orders starting in mid-January. Numerous highways were closed, and railways were shut down.

The Hubei Poultry Association wrote a letter to the China Animal Agriculture Association (CAAA) in late January, saying that its members were “very distressed” due to a lack of poultry feed supplies. The CAAA responded by issuing orders for 18,000 tons of corn and 12,000 tons of soybean meal to be delivered to Hubei.

According to the state-owned media outlet Global Times, Hubei had a population of approximately 348 million live chickens, and annually produced over 532 million marketable chickens before the CCP virus outbreak. As China’s sixth largest poultry producing province, Hubei was also an important egg producer.

But with transportation at a standstill in early February, the Poultry Association implored agricultural officials that without feed…

Source link

China’s economic growth now depends on the West

An employee wearing a face mask works on a production line manufacturing socks for export at a factory in Huzhou

Author: Yukon Huang, Carnegie Endowment

China’s leadership expected that economic growth in 2020 would be a celebratory event, marking a doubling of the economy’s size over the past decade. But the new coronavirus (COVID-19) has obliterated those forecasts despite Beijing’s draconian measures effectively bringing the epidemic under control sooner than anticipated. The nationwide shutdown led to the epidemic’s slowdown in mid-February, but by then the extent and speed of the virus’s spread already paralysed Chinese society.

Chinese President Xi Jinping took a victory lap on 10 March by visiting the epicentre of virus in Wuhan, the capital of Hubei province. By 19 March, the number of new domestically driven cases fell to zero. Almost all new cases were recent returnees from abroad who found it safer to be in China than in Europe, the epidemic’s new epicentre, or the United States, where the spread of the virus is accelerating.

Yet the economic damage to China is severe, and the prospects for recovery — even with massive financial support — remain uncertain. Sustainably restoring China’s productive capacity in the coming weeks would require an unlikely revival of US demand. China’s recently announced economic indicators for January and February were much weaker than market watchers had forecast. Year over year, retail sales fell by 20.5 per cent and industrial production by 13.5 per cent — China’s worst numbers on record.

The prolonged containment effort has left millions of migrant workers unable to return to work, and factories are still struggling to return to full capacity given the shortages of labour and essential parts. Analysts have downgraded their outlook for the Chinese economy and consider a historic contraction in the first quarter nearly guaranteed. Even with a major fiscal stimulus and interest rate cuts, estimates for 2020 growth vary from 1–4 per cent compared to the original target of 6 per cent.

By contrast, the 2002–2003 economic recovery from the SARS virus was V-shaped, as China made up the entirety of its short-term losses by quickly tapping into strong consumer demand in the West. China was relatively unaffected by the 2008 global financial crisis, when global production and supply networks continued to function, enabling it to maintain rapid growth. Moreover, China’s debt situation today compared with a decade ago makes it less likely that it can rely on expansionary monetary policies or credit-fuelled support for the property market to stimulate growth.

While China’s economy is slowly restarting, the global spread of COVID-19 means that major European economies are in turmoil and the United States is still in the early stages of ramping up its response with unprecedented fiscal measures. China will likely struggle to find enough customers in the West, and emerging markets in Asia and elsewhere are simply not large enough to compensate. Affected sectors include automobiles, as major Western companies have closed down production, and communications equipment, as supply chains have been disrupted.

The outbreak will likely force a re-examination of the logic underpinning the US administration’s extensive use of tariffs to pressure China on trade and investment reforms. The phase one trade deal concluded in January is now inoperative, since there is no possibility that China can meet its agreement to purchase vast quantities of US goods this year.

More importantly, the US strategy to pair tariffs with trade restrictions is incompatible with new priorities, such as arresting the pandemic and ensuring producers have access to necessary parts. There are critical shortages in medicinal supplies emerging in the United States, for example, for which availability and cost have been aggravated by the White House’s tariffs and export restrictions. For better or for worse, the global economy is based on connectivity. The revival of world trade and well-functioning supply networks is essential to resuscitating growth in both China and the West.

Yukon Huang is a Senior Fellow with the Asia Program of the Carnegie Endowment for International Peace.

A version of this article originally appeared here on Carnegie Endowment for International Peace.

Read the rest of this article on East Asia Forum

Is Australia trading too much with China?

A man wears a face mask as he crosses a street in the Central Business District in Beijing as the country is hit by an outbreak of the novel coronavirus, China 24 February 2020. (Photo: Reuters/Thomas Peter).

Author: Shiro Armstrong, ANU

China accounts for close to a quarter of all of Australia’s international trade, and over a third of its exports, including both goods and services. Is Australia trading too much with China and too dependent on the Chinese economy, as a lot of the public commentary would have you believe?

This question has come into sharper focus with the Australian government’s travel ban on China due to the COVID-19 coronavirus outbreak. Australia’s tourism and higher education sectors suddenly lost their largest markets overnight.

A narrative is developing that universities were warned about their overdependence on one international market, and now deserve to pay the price for not diversifying. Two of Australia’s top economists, former Treasury Secretary Martin Parkinson and ANU’s Warwick McKibbin, have called on universities to become less reliant on Chinese students, going as far as describing the travel ban as a ‘net positive’ for universities in helping that along.

Hillary Clinton gave similar advice to Australia’s mining sector. Diversifying away from over-reliance on China would seem like the obvious strategy to pursue but if it makes sense, why haven’t Australia’s internationally competitive miners, education providers and the tourism sector not done it already? And is it a good idea to diversify no matter what?

Universities may wish to reduce the number of Chinese students they have, increase students from elsewhere, or both, but will do so only at significant cost. Chinese students are spending family savings and choosing Australian universities over American, British, Japanese and other universities to buy, for the most part, a quality international educational experience. The number of Indian and Southeast Asian students are growing but the biggest growth in the demand for international educational services, and most dynamic market globally is China. It’s the same in tourism and many other sectors of the Australian economy.

Australia policymakers can choose to reduce trade with China by impeding exports and imports, or it can reduce the share of trade with China by intervening in the market to expand trade with other countries, including by diverting trade away from China. President Trump has shown us exactly how that is done. These policy strategies necessarily incur costs. The question for those advocating such a strategy: if one-third of total exports to China is too much exposure, what’s the acceptable or the right share? And what’s the cost of attaining it?

It shouldn’t require too many sophisticated sums to show that de-concentration of Australia’s resource exports on markets in China, Japan and South Korea would come only at huge cost to the mining sector, Australian trade and the Federal coffers. The costs to China, Japan and South Korea on de-concentration in their imports of these materials would be similarly huge.

Australia’s ability to utilise its endowments and take advantage of opportunities internationally should be celebrated and protected. Australia is no stranger to having one country dominate its international trade shares. At its peak in the 1970s and 80s, Japan accounted for roughly the same share of Australia’s trade as China does today. Trade with the United States peaked during World War 2, accounting for 39 per cent of Australian imports and 40 per cent of its exports. The United Kingdom consistently accounted for over half of Australia’s trade, and up to 60 per cent, up until the end of Commonwealth preferences after World War 2.

Instead of intervening in the market to reduce trade shares with China, a far better strategy is to manage these highly interdependent economic relationships and manage the inevitable shocks in their fortunes, some self-inflicted, that occur from time to time.

Universities, farmers and other businesses make commercial decisions based on risk assessment that includes diversification. Diversification is a form of self-insurance and comes with a cost. One of the biggest risks for many businesses is to limit engagement in the huge Chinese economy with a rapidly growing middle class.

The first line of defence against economic shocks from abroad is a well-functioning and robust macroeconomic framework. A flexible exchange rate that acts as a shock absorber, a flexible economy and labour market that adjusts to the large prices changes, a robust social safety net and fiscal and monetary space to cushion and facilitate that adjustment. That’s what saved Australia from recession in the last 28 years…

Source link