Reforms in China, India, Japan key for growth in Asia

 A recovery in Japan will benefit the region, says ANZ Bank’s chief economist for the Asia-Pacific Glenn Maguire.
A recovery in Japan will benefit the region, says ANZ Bank’s chief economist for the Asia-Pacific Glenn Maguire.ST PHOTO: CHEW SENG KIM

There is a rush of renewed hope coursing through Asia, fuelled by expectations for the region’s three growth engines.

China, India and Japan – which together make up 30 per cent of the world’s gross domestic product (GDP) and are home to 2.6 billion people – are busy whipping up new ways to manage their economies.

If successful, these plans could lift the rest of Asia, including those countries once hailed for their “tiger economies”, which had earned the title because of the rapid growth they were able to achieve but which seem less worthy of it today.

Looking at the changes planned, ANZ Bank’s chief economist for the Asia-Pacific, Mr Glenn Maguire, concludes that next year, reforms will be “one of the big hooks” – or themes – sought after by the market. 

“It will be a year when the mettle of Asia’s reforms will be tested,” he said during an interview ahead of The Straits Times Global Outlook Forum held last Friday.

Change is good

CHINA has far-reaching plans for economic and social reform aimed at propping up an economy that is grinding down after decades of growth at breakneck speed. 

Mr Maguire is a proponent of the reforms, noting that “China’s Third Plenum (the reform agenda) contains lots of promises”.

Yet, the Asian region right now is more sensitive to changes in the G-3 economies of the United States, Europe and Japan than to changes in China.

That is not a bad thing for Asia – the G-3 economies are expected to recover, so export-oriented Singapore, Taiwan, Malaysia, Thailand and South Korea, in particular, stand to benefit.

The Japanese revival 

Armed with a strong mandate from the electorate, Japanese Prime Minister Shinzo Abe has ambitious plans to revive his country’s once high-flying but now flagging economy.

Aggressive monetary stimulus measures are being planned that could propel money back into the global markets, where the US Federal Reserve will leave a vacuum once it starts to taper its own stimulus programme. Japan could thus help offset some of the adverse effects of the tapering. 

Moreover, because of tensions with China, Japan has been moving its production platform out of China into Thailand and, more recently, Indonesia and Malaysia. 

In contrast to the volatile and speculative flow of money that could stem from the Fed’s quantitative easing, the expected inflows from Japanese foreign direct investment (FDI) should be more stable and productive for Asia’s economies.

In addition, a weaker yen should allow Japan to claw back market share from Taiwan and South Korea, which manufacture largely the same type of goods. 

“Such strong dynamics, which could lead Japan’s recovery, should provide powerful support for South-east Asian economies,” said Mr Maguire. 

He believes the region is largely done with the volatility and tactical outflows that took place after May, when the Fed first signalled its tapering plans.

In other words, if and when the Fed starts to scale back its stimulus programme, which most expect to happen by March, the outflows could be less dramatic than previously feared.

Asia’s problem children 

The world’s second most populous nation, India, is struggling to get its house in order, faced with a falling currency, a widening current account deficit and rising inflation. 

Some believe the structural reforms urgently needed to kick-start the waning economy will be accelerated in the run-up to the general election in May. 

Yet, Mr Maguire finds it hard to see India as a key risk for next year as it “is not going to be significantly contributing to or detracting from regional growth”. 

However, there are other problem spots. Indonesia’s widening current account deficit and rising inflation have triggered worrying capital outflows. “If investors start to baulk, it might lead to a sentiment risk that could attract capital outflow elsewhere in Asia,” Mr Maguire noted. 

Reforms and more reforms

Other Asian nations have stepped up reforms as well. 

Singapore is undergoing a structural – and some say much-needed – transformation from an input-driven economy into a productivity-driven one. The transition is necessary, but it could slow growth. 

Malaysia is finally displaying some commitment to remedying its budget deficit by cutting subsidies. It also plans to introduce a goods and services tax that is viewed as constructive. 

Mr Maguire feels these structural reforms in many parts of the world are absolutely necessary. 

“How each of these economies progresses with structural reform next year will provide a key benchmark for their performance in the coming decade,” he added. 

2013 v 2014

At the start of this year, there were high hopes that China’s robust growth would continue, the US recovery would crank up, Europe might crawl out of recession and deflation-plagued Japan could see a reflation. 
For the most part, reality failed to live up to expectations.

“This year was one of disappointment. It began with lots of promise and we thought we’d see a synchronised global recovery,” said Mr Maguire. “It turned out to be a story of multi-speed growth across the globe and the region while the US seems to be the only game in town.” 

Hopes are now being pinned on the year ahead.

“There are going to be quiet bits like the eye of the storm in 2014, but the general backdrop is going to be relatively more even. That’s a positive,” Mr Maguire said.