Asia’s main economies were boosted by a sharp rebound in exports during the first quarter of 2017, according to VP Bank.
In its latest regional report, the Liechtenstein-based private bank comments that the revival is not only positive for the region’s overall growth, but also helps to dispel the notion that Asian exports have suffered a structural break from global growth.
The report notes that export growth could once again be a major driver of Asia’s gross domestic product (GDP) growth this year, provided that no high tariff walls are established. The US trade review will also bring forth some positive aspects to global trade with its focus on ensuring adherence to international norms, rules and agreements which will address existing trade barriers.
There is also no clear indication that the US administration is pushing for a border adjustment tax (BAT) per se, and if imposed, currencies of its trading partners could weaken to offset the impact on their trade. Hence, export development in the 10 Association of Southeast Asian Nations (ASEAN) countries could come out better than originally expected in 2017.
A continuing major risk is a strengthening of the US dollar (USD) which could harm some Asian economies. The USD is expected to appreciate over the next quarter due to the credit spread and expected further US interest rate hikes.
The report notes that in the 2000-07 pre-crisis period, the volume of exports of goods and services from Asia ex-China rose about twice as fast as the combined US, European Union (EU) and Chinese GDP growth. Since 2011, the ratio has fallen rapidly. The decline in export growth was driven by falling commodity prices, which imposed a large terms of trade shock on commodity exporters.
The commodity market has changed significantly in the last quarters. Already, in Q4 of 2016, Asian exports were growing at their fastest pace in two years. The commodity element also helps to explain why export growth has been so strong so far this year.
Fears that this could be undermined by new tariffs have been fuelled since president Trump signed two executive orders to review the US trade deficit and to strengthen and ensure anti-dumping rules and enforcement. The deficit review will examine forms of “trade abuse”, taking a country-by-country look over a 90- day period at cheating, tax enforcement and currency misalignment.
For those economies identified as currency manipulators, the US Treasury will need to go into further detail. The US trade review will not necessarily weigh on global trade, but focuses on ensuring adherence to international norms, rules and agreements, its efforts could then be positive for global trade. Violations of intellectual property rights (IPR) protection, thefts of trade secrets and industrial policies that force technology transfers on companies, among others, are trade barriers that clearly need to be addressed.
China’s property bubble
Besides some fears of US trade restrictions, China’s property markets are in the focus of financial markets. The country’s property sector, a key pillar of economic growth in 2016, is likely to cool this year. Housing prices in China’s tier- 1 cities like Shanghai have doubled over the past two years. The government, concerned by the potential economic and social problems such a surge may cause, has rolled out restrictive policies to curb the housing bubble.
However, the tone is already changing again. The government released its work plan for 2017 on March 5. China’s administration does not take “containing property bubble” as a policy priority for 2017. Rather it still places more emphasis on cutting housing inventory.
Why would the government tolerate the property bubble despite signs of risks? The most important point is that the property sector has become indispensable and the single most important sector in China. Deflation due to the bubble would be devastating for the economy and for government revenue. China’s economic growth is still heavily reliant on fixed asset investment, with capital formation accounting for 45% of GDP and property investment accounting for about one quarter of total investment.
While the property bubble is unlikely to implode in the near term, VP Bank foresees risks in the mid- to the long-term. Even in the event of a controlled cooling of the market, implications are enormously. It will lead to a significant slower investment growth and a significant slower GDP growth rates in general.
This perspective supports the bank’s view that Chinese growth rates will come down further over the next two years. In practice, this means encouraging the development of a mass consumer society, boosting services sectors and shifting away from investment in heavy industry, real estate, manufacturing and export capacity
Asia remains an attractive alternative for overseas investors, the report concludes. Although extreme fluctuations are not to be expected, political changes, as the US presidential elections in November did, could aggravate higher volatility. The ASEAN economic outlook remains relatively friendly compared with the industrialised world and should keep the downside in check, while the upside will be capped by the global growth environment and higher credit risks this year.
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