Pictet Group
Asia comes to grips with a changed global paradigm
China
To say 2022 was a difficult year for China is an understatement. Stringent covid restrictions that lasted most ofthe year crushed the economy and eventually led to protests across the country unseen in scale since 1989. The property sector also slumped as a result of the government’s restrictions on credit to private developers, which pushed the entire sector into a liquidity crisis.
While the authorities made an abrupt U-turn on both policies at the end of last year, the damage has been done. The slump in the housing market, along with the heavy-handed regulatory campaigns in other sectors such as consumer internet and education likely has accelerated the decline in China’s potential growth beyond our previous expectations.
Structurally, possible demographic decline and a much slower pace of urbanisation suggest that the demand for urban housing has likely peaked and may trend downward. On the supply side, many developers had boosted their leverage as they increasingly looked to high turnover to maintain profitability as margins began to shrink.
China’s growth potential may be damaged by the sharp deterioration of the geopolitical environment.
Against this backdrop, instead of seeking a soft landing for the housing market, the Chinese government choseto force developers to deleverage in a bid to avoid systemic financial risks. The result, as it turned out, was aself-inflicted liquidity crisis on top of a structural slow-down. Although the policy was eventually abandoned, the market may have changed in fundamental ways. In a break with the past two decades, housing-related activities (construction and services) will likely stop being a major growth driver for the Chinese economy in the 10 years to come and may even turn into a drag.
China’s growth potential may also be damaged by the sharp deterioration in the geopolitical environment. Having identified it as a strategic competitor, the US is taking a increasingly aggressive stance towards China, especially the country’s technology sector. The US’s effort to lead an alliance to restrict China’s access to advanced semi-conductor technologies is a recent example. While this has prompted the Chinese government to pour even more resources into research and development in order to advance autonomy in the area of high tech, the task is daunting and there is no guarantee for success. As China approaches the technology frontier and faces increasing technology restrictions on top of heightened caution among foreign investors, productivity growth in China could slow as well.
All these factors have led us to revise down our projected growth trajectory for China, having already revised it downward last year. After the post-covid rebound, we now expect Chinese GDP to grow by an annual average of about 4% in the next few years (80–90bps lower than our previous forecast). The annual growth rate may decline to 3.7% toward the end of our 10-year forecast horizon (50bps less than our previous forecast).
We expect Chinese GDP to grow by an an annual average of about 4% in the next few years.
On the inflation front, our forecast for China remains unchanged at an annual average of 3.2% at the end of our 10-year forecast period, over one percentage point higher than in the past 10 years. An ageing society, deglobalisation and China’s green transition are the main factors behind our expectation for higher inflation going forward.
Japan
Following his election as Japan’s prime minister for the second time in 2012, Shinzo Abe announced that his administration would “implement a bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment and, with these three pillars, achieve results.” This ‘three arrows’ policy mix came to be known as Abenomics an led to the boldest monetary experiment by any major central bank on earth. After 10 years of aggressive monetary easing, the Bank of Japan’s (BoJ) balance sheet has ballooned to JPY704 trn, equivalent to 128.6% of GDP in Q4 2022 (down from a peak of 135.8% in Q1 2022), the highest of any central bank in the world. And the BoJ owns about half of all Japanese government bonds outstanding.
We believe the appointment of a new BoJ governor in 2023 will likely gradually head to policy normalisation in the coming years. But this will likely be a long process and will not be easy. A public debt-to-GDP ratio of 260% means the BoJ will have to be very careful in guiding bond yields. In our view, the BoJ could start the normalisation process by continuing to widen the trading band within which the 10-year Japanese government bond (JGB) is allowed to fluctuate as a means of paving the way for complete removal of its yield curve control. Thereafter, the BoJ could end its negative interest-rate policy. However, the central bank could persist with its asset purchases for longer. Our long-term projections for growth and inflation in Japan remain unchanged from last year. We expect Japan’s real GDP growth to fall back to about 0.9% per annum after the post-covid rebound fades. Growth will mainly come from gains in productivity. Capital investment, especially on green infrastructure, could also contribute to growth. The contraction in Japan’s labour force will likely remain a structural headwind, especially as the room for further increases in women’s labour participation rate is limited. We continue to believe that annual core inflation in Japan will average 0.9% over the next 10 years. This would be higher than the average in the 10 years from 2013 to 2022, but still well below the BoJ’s current 2% target.
Rest of Asia
Rising US-China tensions and the covid pandemic have boosted the importance of supply-chain diversification. ‘Just in time’ has given way to ‘just in case’. The trend for multinationals to relocate parts oftheir global supply chains (mainly out of China) will likely continue in the decade ahead. Some Asian economies are set to benefit from the process. As we have argued in previous editions of Horizon, we believe Vietnam could be one of the top beneficiaries of the relocation trend. The country is located conveniently between China and other southeast Asian countries, it has a large, low cost workforce and the government has adopted a set of policies friendly to foreign investors.
Many other ASEAN economies could also benefit from supply chain reshuffling and resulting regional integration. The establishment of the Regional Comprehensive Economic Partnership (RCEP ) in January 2022 could be an additional catalyst. Hailed as the world’s largest free trade agreement, accounting for one-third of global GDP and trade, the RCEP is expected to notably enhance Asia’s regional economic integration by improving the overall business environment, harmonising tariffs and coordinating efforts to attract more foreign direct investment in the years to come.
India has a large demographic dividend that is yet to be unlocked.
India, the second-largest emerging economy in the region, also seems to be gearing up to capture the opportunity. Having overtaking China as the world’s most populous country in 2022, India has a large demographic dividend that is yet to be fully unlocked1. Under prime minister Narendra Modi, the Indian government has significantly stepped up capital spending in recent years to improve the country’s infrastructure, an area where India has long been seen as trailing China. While the infrastructure gap still remains fairly wide, things are heading in the right direction. In addition, some of the government’s fiscal incentives such as the Production-Linked Incentive schemes, which reward firms with large scale production in India, have started to convince an increasing number of manufacturers to expand their operations in India. These positive developments explain why we have decided to revise up our forecast for India’s GDP growth by 20bps to an annual average of 6.2% over the next 10 years.
Last but not least, the two technology powerhouses in north Asia, namely Taiwan and South Korea, will likely maintain their lead in global semi-conductor manufacturing. As the world heads toward another major wave of innovation, possibly with technologies like artificial intelligence playing a central role, the demand for high-performance chips will likely remain strong, to the benefit of Taiwan and South Korea. However, both economies are facing significant geopolitical uncertainties, especially Taiwan. There is a risk that the binary nature of some geopolitical events eventually leads to disruptions in world semi-conductor supplies at some stage over the next 10 years.
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