By R. Bruce Striegler
In a recent web seminar offered only weeks before Chinese currency adjustments, Journal of Commerce presenter Rajiv Biswas says the Asia Pacific region remains the fastest growing geographic area of the global economy. Mr. Biswas, Chief Economist for Asia-Pacific at IHS Economics & Country Risk notes the region comprises some of the world’s strongest and most rapidly emerging economies including manufacturing and export giant China, as well as India, Vietnam and Malaysia Mr. Biswas notes that the dynamics of trade with the region are rapidly changing as China and the others are developing a fast-growing middle class.
Touching on international currencies, Mr. Biswas says that it is anticipated that the U.S. dollar will remain very strong. There are expectations of a Federal Reserve rate rise later this year and further rate increases next year to maintain the dollar’s strength. “There are risks to other currencies as a result of the first Fed rate hike, particularly in Asia there could be fragility amongst some of the emerging currencies as well as some of the other emerging currencies such as Turkey or South Africa.” Putting global economic growth in context, Rajiv Biswas summarized the current state of the world’s economy. “We see the U.S. growing at about two percent this year. Growth has been impeded by a very weak first quarter but we’re expecting momentum to pick up as we move through the middle of the year, rising to about three percent in 2016.”
He notes that the prospects for the Eurozone have been helped by the recent Greek bailout package, “We think this lifts the near-term risk from the Eurozone and should allow the gradual recovery that has been underway to continue through 2015 and into 2016.” “I think the Eurozone in the mid-term is doing well and that is flowing through to emerging Europe as well. We’re seeing real GDP growth, particularly in countries such as Poland or Czechoslovakia that have strong links to Western Europe, especially the German manufacturing sector.”
Biswas says Russia is experiencing a severe depression due to declining oil prices as well as sanctions and capital flight. “We expect this year real GDP will decline by about four percent and recessionary conditions will continue into 2016, although easing somewhat in severity.” He notes that sanctions have isolated banks and enterprise from international capital markets and the cost of raising funds domestically has soared. “Rising inflation is hurting household purchasing power and spending power. Real GDP is expected to decline 4.1 percent in 2015 and 0.8 percent in 2016.” Biswas explains that sanctions reduce access to oilfield technology and western capital which will lead to a decline in oil production in 2016 and beyond. “Russia has unfavourable demographics, outmoded manufacturing capacity, and over-burdened infrastructure which will limit long-term growth.”
India the new star in Asia Pacific region
Mr. Biswas suggests that Japanese GDP is forecast to be in the order of one to 1.5 percent over the next year or so. “We have a rather gloomy view of the longer term prospects unless there are serious structural reforms in the Japanese economy which the government hasn’t been able to deliver so far.” Mr. Biswas notes the prospects of an EU-Japan free trade agreement which could help boost long-term growth, “Also if the Trans Pacific Trade agreement comes to fruition, that would also be of benefit, but fundamentally they are stuck in a low-growth trajectory over the longer term.” He adds that the weaker yen is helping the export economy, but the manufacturing sector is gradually hollowing-out. “The domestic market is declining and large multi-nationals are building facilities in growth markets elsewhere in Asia, countries like India.” Biswas says, “We should have no illusions that Japan will have strong growth. It’s a country held back by a declining population, a severely aging demographic and very high levels of government debt.”
Biswas says the big story is emerging India where new economic policies have been implemented, inflation is declining and momentum growing. “We anticipate Indian growth of about eight percent by 2016.” Overall he says, the Asia Pacific region should grow at about 4.8 percent this year, improving in 2016 helped by the forecast growth in the U.S. of 3.1 percent and the slowly improving Eurozone. India’s 2015-16 budget reaffirms the government’s commitment to reforms, offering a timeline for a GST-like tax, reducing corporate tax rates from the current 30 percent to 25, with no retroactive tax laws being applied. Furthermore, the Indian government has committed to investment of US$137 billion in railroads, and within the next five years to build roads and ports. As well, there are promises of electrification of 20,000 villages by 2020 and the promise to create a National Investment and Infrastructure fund. In an attempt to reduce bureaucratic delays, India plans on introducing a ‘single window’ mechanism for permit approvals, develop a ‘Skilled India’ campaign, while at the same time, asking individual Indian states to create a national industrial land bank.
China growth slows to about six per cent
In China he notes that the spectacular growth over the last 30 years is diminishing. “We’re now in a phase of moderation from about ten percent in 2010 when the big stimulus program was helping growth, down to about 6.5 percent this year.” Looking out to 2030, Mr. Biswas says Chinese growth is expected to moderate even further, down to about five percent, adding that an aging demographic is holding down Chinese growth.”In the longer term China has an aging population and also, we expect declining productivity will also have an impact on growth. It’s no longer a ten percent economy, at the moment we think China can grow at six to seven percent over the medium term.” He adds that by then, it will be a much bigger economy, saying that five percent for the world’s Number Two economy is still a pretty good rate of growth.
Explaining the turmoil in the Chinese market he notes that after rising by around 150 percent since November 2014, the Shanghai stock market has slumped by around 30 percent since June 12, 2015. “Speculation and use of leverage were key features or the rapid rise of the stock market. The unwinding of margin loans presents a major risk, given the opaqueness of margin loans financing and that margin loans have increased during the bubble.”
Explaining that The People’s Bank of China has attempted to support the market by cutting the policy rate and reserve requirement ratio, Mr. Biswas noted this had little impact. “Further government actions have included stopping new IPOs and creating a stock market stabilization fund to buy equities. Large shareholders have also been banned from selling shares for a period of six months.” He says that these steps may have put a temporary floor on the market, but by reducing the liquidity of the market considerably, he says it’s “More like putting on bandages to stem the selling pressures. It’s certainly not any fundamental resolution of the problem – which is, it’s a very speculative market that had turned into a bubble.” Three weeks after his remarks, China de-valued its currency, a move that some financial analysts say signals a shift in the bank’s monetary policy, one that may indicate the country is moving towards a more market-oriented approach for its currency. “There are still a lot of uncertainties with China,” Mr. Biswas notes.
In the meantime, China has built 39,000 kilometres of long-distance power transmission lines, an investment of US$38 billion. Electricity generated by power plants burning domestically-produced coal, as well as hydro power, can now be transported to coastal provinces where it competes with those provinces’ power produced from LNG and imported coal. Mr. Biswas says it is expected that the share of gas in energy supply in coastal China will rise to provide energy supply security from 3.6 percent to 6.7 percent by 2020. “China will more than double its imported LNG volumes by 2017, with 21 million tonnes of newly contracted LNG beginning delivery by 2017. At the same time North American producers are looking to export shale gas to Asian markets, Chinese firms are investing in other gas projects in Mozambique, Russia and Kazakhstan.”
Biswas points out that the Chinese government has undertaken market reforms in 2014 to allow third party access to China’s oil and gas network infrastructure. “Non-National Oil Company LNG imports could provide a new channel for LNG sales, albeit much smaller than China’s national oil company that dominates the market.” In spite of the Chinese turmoil, he says, “When we look at the long-term, that is, the next ten to twenty years, we do expect the Asia-Pacific region to be the fastest growing portion of the global economy.”