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US-China Risks That Threaten Stable Growth in Asia

While the Asian economy is expected to continue its recovery led by the service sector, it is necessary to be cautious of a downturn in the US and Chinese economies, which are highly dependent on the economy. In addition, there is no end in sight to the US-China confrontation, and there is a smoldering risk that the global economy will become increasingly divided.

1. Asian economic recovery led by the service sector will continue (1) The Asian economy is generally recovering due to the
difference between dependence on external demand and dependence on domestic demand , but since the beginning of 2023, there have been large variations in the pace of recovery between countries and regions.
. The economy, which is highly dependent on external demand, is in a difficult situation as exports of goods are declining against a backdrop of weak global demand for high-tech products. Among them, his real GDP for the January-March 2023 quarter of Taiwan and Vietnam was negative quarter-on-quarter, and Taiwan was in a technical recession (the real GDP was negative quarter-on-quarter for his second consecutive quarter). On the other hand, the growth rate of the Philippines and Indonesia, which have a large share of domestic demand, increased for the 11th consecutive quarter, and the growth rate of India increased for the second consecutive quarter. In these countries, the positive impact of the normalization of economic activities continues even after the restrictions on activity in response to the coronavirus have been lifted, and domestic demand, especially consumption, is increasing strongly. In China, the real GDP growth rate for the January-March quarter was +2.2% compared to the previous quarter, and domestic demand rebounded after the end of the zero-corona policy, and the economy is recovering at a rapid pace. In China, the reopening of the economy has greatly boosted the economy, but the rapid recovery in non-manufacturing activity due to the rebound in demand for services such as travel and dining out, which had been suppressed by activity restrictions, is driving the economy. On the other hand, demand for goods such as automobiles and home appliances continues to slump, and business confidence in the manufacturing industry is deteriorating. The fact that China’s economic recovery is biased toward services is also a factor slowing the recovery of the economy as a whole, which is highly dependent on external demand.

(2) Recovery is expected to continue in the future, although the service sector is flying with one hand
As for the future, we expect the Asian economy as a whole to continue recovering due to the following three factors: (1) continued recovery in service exports, (2) improvement in the employment environment, and (3) a lull in upward pressure on interest rates.

First, inbound demand is expected to remain strong, compensating for the slump in goods exports. From the spring of 2022, immigration restrictions in Asian countries will be eased one after another, and the number of overseas tourists, mainly within the Asian region, will pick up. The number of visitors to Asia in March this year recovered to about 50% of 2019. Moreover, since February, the Chinese government has lifted the ban on group tours, mainly for her ASEAN countries. Thailand and Malaysia, which are suffering from sluggish goods exports, are expected to boost the growth rate through service exports as the number of Chinese tourists increases further from the second half of the year.

Second is the improvement of the employment environment. Economic activity is normalizing, with the easing of business restrictions on restaurants and entertainment facilities, employment is recovering, and the unemployment rate is falling. In ASEAN countries in particular, the number of employees in the service industry has increased significantly, and the recovery in inbound demand is boosting this trend. An improvement in the employment environment is expected to bring about an increase in income and become a factor to support robust consumption.

Third, the downward pressure on domestic demand due to interest rate hikes is easing. Many central banks in Asia have successively raised their policy interest rates from 2022 onward, following the example of the United States. However, more and more central banks are suspending interest rate hikes. According to the IMF Commodity Price Index, soaring food and beverage prices are coming to a halt, and energy prices are falling sharply. Some countries, such as South Korea and the Philippines, are seeing inflation well above central bank targets, but overall, inflationary pressures in the region are declining. Furthermore, the exchange rates of Asian countries/regions, which fell in 2022, will generally stop declining in 2023. This is because the pace of interest rate hikes in the United States has slowed and the outflow of capital from the Asian region has come to a halt. As inflationary pressures recede and exchange rates stabilize, central banks in Asia are expected to adopt a neutral or accommodative monetary policy stance for the time being.

Based on this, he expects the growth rate of Asia as a whole to increase by 5.3% year-on-year in 2023, and he expects stable economic growth on par with 2019 (+5.0%) before the corona crisis. This year’s growth rate forecast is an upward revision from the +4.8% y/y forecast in November last year. This is due to the faster-than-expected recovery in the economies of China (revised +0.7% points) and other economies that have been largely boosted by domestic demand. However, in the second half of 2023, we expect the momentum of the Chinese economy to slow down as the rebound in consumption of services such as travel and eating out will run its course. The driving force for the Asian economy as a whole is expected to shift to the ASEAN 5, where growth rates are rising led by domestic demand. For 2024, we expect a relatively high growth rate, albeit slowing down to +5.0% y/y. Although the Chinese economy lacks momentum, it is expected that stable growth will be maintained in the Asian region as a whole, with factors such as the recovery of exports from Taiwan and South Korea pushing up the growth rate.

(3) The risk is an economic downturn in the US and China
On the other hand, uncertainties about the US and Chinese economies are increasing, and their direction poses a risk to the Asian economy. If the US and Chinese economies, which can be said to be the two wheels of the global economy, suddenly change, the Asian economy will be greatly affected.

The U.S. economy has continued to recover steadily until now, but the momentum is slowing due to the rapid rise in interest rates. Furthermore, financial risks such as the bankruptcies of regional banks and other financial institutions continue to smolder, and there are growing concerns about an economic downturn. In China, service consumption, which has been restrained due to the corona crisis, is strong, but other demand is sluggish. The slump in demand for housing is remarkable, and structural problems such as the declining birthrate and the accumulation of excess housing inventory in rural areas are likely to exacerbate adjustments in the real estate market. There is a risk of a deeper recession due to changes in the financial and real estate markets.

There are also concerns about the impact on the semiconductor sector, where demand remains stagnant. In the semiconductor market, as of the middle of this year, inventory adjustments have not progressed sufficiently, and the road to recovery in production is still unclear. The economic downturn in the United States and China, which are major sources of demand for high-tech products, will further delay the recovery in demand for smartphones and personal computers, which has stagnated due to factors such as the end of stay-at-home consumption. Furthermore, the economic downturn in the US and China may put downward pressure on demand in new fields such as AI that are expected to grow in the future. In Taiwan and South Korea, if the stagnation in demand for semiconductors in their main industry persists, the economy will deteriorate significantly, and as a result, the economy of Asia as a whole will also fall sharply.

2. Asian economy shaken by US-China confrontation
The importance of the US-China economy in Asia is not limited to short-term economic growth. If the conflict between the two countries, which shows no signs of abating, escalates, it will ultimately lead to the division of the global economy, and there is a risk of severe damage to the Asian economy.

Since 2020, the spread of the new coronavirus and Russia’s invasion of Ukraine have disrupted trade transactions, accelerating discussions on economic security worldwide and leading to moves to rebuild supply chains. The US-led de-risking (risk reduction) movement targeting China is accelerating. With the aim of strengthening the supply chain, there is also a continuing movement to strengthen “friend shoring,” which aims to complete transactions within friendly countries. In May, the IPEF (Indo-Pacific Economic Framework) “Supply Chain Agreement” was agreed by 14 participating countries, APEP (American Partnership for Economic Prosperity), QUAD (Japan-U.S.-Australia-India Strategic Dialogue), AUKUS (U.S.-Australia-India Strategic Dialogue). Discussions on frameworks such as the UK-Australia Security Framework are also progressing.

In particular, the movement to rebuild the supply chain in the semiconductor field is accelerating, and the environment is becoming severe for China. In recent years, the U.S. has tightened restrictions on China in an effort to curb the expansion of Chinese semiconductor manufacturing capacity. Furthermore, discussions at CHIP4 (Japan-U.S.-South Korea-Taiwan Semiconductor Alliance) are progressing, and the system for mutual cooperation in semiconductor production is being strengthened in a way that excludes China. The United States has launched the CHIPS Plus Act (budget of approximately $52.7 billion), while Japan has launched a program to secure domestic production bases for cutting-edge semiconductors (approximately ¥1 trillion). are trying to bring to their country Furthermore, Taiwan amended its Industrial Innovation Ordinance (Taiwan version of the CHIPS Act) to expand corporate tax deductions (R&D expenses from 15% to 25%, capital investment from 0% to 5%). It is promoting the return of semiconductor companies to the domestic market by aiming to invest more than 340 trillion won through infrastructure support, deregulation, tax system support, etc. under the National Achievement Strategy. In fact, while semiconductor-related capital investment is stagnant in China, it is rapidly increasing within CHIP4, accelerating the movement to increase manufacturing capacity.

However, this kind of friend shoring and repatriation does not necessarily have only positive effects on Western countries and countries friendly to the United States. In particular, Asia, which plays a central role in the supply chain of the manufacturing industry, faces the risk of (1) economic fragmentation and associated exclusion, and (2) industrial relocation that ignores economic efficiency and impedes the development of emerging countries. Caution must be taken.

First, if the economic bloc is fully fragmented, the negative impact on the Asian economy will be enormous. Estimates by the European Central Bank indicate that friend shoring, which causes economic division, will reduce global GDP by up to 5.3 percentage points, with greater negative impacts in Asian countries such as Singapore, Vietnam, and South Korea. This estimate is based on the assumption that countries will be mechanically divided into Western blocs and Eastern blocs based on voting patterns at the United Nations General Assembly, and that non-tariff barriers such as regulations will increase. Ultimately, it cannot be denied that such a situation will occur. Developing and emerging countries, known as the Global South, are thought to be aware of these economic disadvantages, and are not positive about cooperating with the US-led supply chain restructuring. In Asia, ASEAN is reluctant to pursue a US-led reorganization, and behind this is the strong economic relationship with China, which accounts for the largest share of ASEAN’s trade transactions. In addition, as the movement towards division grows stronger, there are moves by the United States and China to exclude the other country’s companies from each other’s markets. In May, the Chinese government banned domestic critical infrastructure operators from sourcing products from US chipmaker Micron. China is a major consumer of high-tech gadgets, with smartphone sales in China accounting for more than 20% of her global sales. The loss of Chinese demand, especially for high-tech equipment, would not be small for companies in Western countries and friendly countries.

Secondly, the focus on economic security as the purpose of restructuring supply chains has led to production relocations that are not conscious of economic efficiency. Western countries and China, especially in the semiconductor industry, are expanding their efforts to attract companies through subsidies and to protect domestic companies. However, partly because the Global South is not active in friend shoring, subsidies for relocating companies to emerging countries have remained small so far. Up until now, under the management strategy of “China plus one,” which involves dispersing overseas bases to countries and regions other than China, global companies around the world have chosen emerging countries such as ASEAN, which are highly substitutable for China, as new bases. , which has contributed to the economic growth of emerging countries. However, if Western countries and China use subsidies to accelerate transfers with low economic efficiency, it is possible that ASEAN and other countries will no longer be able to expect economic development as a benefit of globalization.

Source : jri.co