Asia Pacific Macro – January 10, 2022

| January 10th, 2022

Today’s issue is focused on policymakers’ current dilemma, both monetary and fiscal. Examples of this come from South Korea, whose Central Bank will have a meeting later this week regarding a potential rate hike, while the economy is impacted by Omicron; and China, which is facing the increasingly complicated issue surrounding its real estate sector.


1.1 S. Korea’s central bank likely to raise key rate this week to tame inflation – Yonhap News

South Korea’s central bank is widely expected to raise its key interest rate at a rate-setting meeting later this week to tame growing inflationary pressure, reflecting the U.S.’ Federal Reserve’s faster-than-expected move to tighten its monetary policy, experts said Monday.

Some still raised the possibility the Bank of Korea (BOK) could stay put this week given persistent uncertainty over the coronavirus pandemic and the omicron variant, voicing worries that a further increase in borrowing costs could knock the economy off its still fragile recovery trend.

On Friday, the BOK is set to hold this year’s first rate-setting meeting to determine whether to raise its policy rate.

The meeting comes after the central bank raised the rate by a quarter percentage point to 1 percent in November, ending two years of the zero range rate put in place to prop up the pandemic-hit economy. The decision followed a 0.25 percentage point rise in August, the first pandemic-era hike.

Voicing concerns over rising consumer prices and financial imbalance caused by protracted low borrowing costs, BOK Gov. Lee Ju-yeol earlier said the current monetary policy is still “accommodative” and left the door open for the possibility of further rate increases early this year.

Comment: While not specific to South Korea, the issue of what Central Banks could do was discussed in yesterday’s Week Ahead, a podcast in cooperation with Complete Intelligence. In summary, many Central Banks could face a tantrum of some kind, regardless of the action they take. To quote Nick Glinsman, “Equities will have a tantrum if the central banks move against inflation, while bonds will suffer a tantrum if the central banks do not”.

1.2 China corporates are gambling that the PBOC gets its way on yuan – Bloomberg

Chinese companies can’t afford the PBOC to permit more yuan appreciation. And this isn’t just about making their exports less competitive. There’s reason to believe that the Chinese corporate sector has such faith in the PBOC holding the line that they are no longer adequately hedging their naturally accruing yuan shorts.

As is easily established by a glance at China’s trade balance, China’s corporate sector are massive net exporters who receive revenues in foreign currency (e.g. dollars) and have costs in yuan. Their natural flow, as a group, is to need to sell USD/CNY. If hedging through options, that would equate to buying USD/CNY puts.

But…Chinese firms had been net selling USD/CNY options for 17 consecutive months, as of November – the longest such streak in history, according to data from China’s State Administration of Foreign Exchange.

Comment: Meanwhile, monthly Chinese foreign exchange reserves have been growing, reaching a six year high.

A larger reading of the central bank’s foreign exchange stockpile could also indicate dollar buying to stem the yuan’s rally, which would be in line with the afore-mentioned expectations of the Chinese corporate sector.

1.3 India yields hit two-year high as RBI sells in secondary market – Bloomberg

India’s benchmark yield jumped to the highest in two years as demand for bonds at recent auctions dwindled amid concern over the central bank’s consistent sales of the nation’s debt in the secondary market.

The 10-year bond yield rose five basis points to 6.59%, highest since January 2020. That’s after underwriters stepped in to buy nearly 44 billion rupees ($593 million) of 60 billion rupees of the 2026 debt for sale on Friday. The last time underwriters rescued an auction was at end-July.

[…] The market isn’t getting any help in absorbing longer-duration bonds and the RBI is actively adding to debt supplly in the market through its permanent liquidity operations, said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. There’s risk that the market may lose appetite for debt without intervention, he said.

Comment: This very topic was also mentioned in the Week Ahead podcast, wherein the Central Bank quantitative tightening could also lead to a tantrum in the bond market.

Speaking of inflation, a recent Reuters poll resulted in the Indian inflation forecasts rising to 5.80%, from 4.91%. That would just be within the upper bound of the acceptable range and may trigger a response from the RBI, which has been wary of such an outcome.


2.1 The downfall of Evergrande foreshadows a difficult decade for China – and for Xi Jinping – New Statesman

The long-expected default of China’s second biggest property developer, Evergrande – with more than $300bn of liabilities – was called on 9 December. The fate of the company is yet to be decided, but it will involve some sort of restructuring, ownership change and allocation of losses. The consequences for the wider real estate sector, the economy and China’s political landscape are arguably more important, including for Xi Jinping.

The Evergrande default, along with that of another developer, Kaisa Group Holdings, came and went with little fanfare. Financial markets were more focused on the loosening of monetary policy by the People’s Bank of China, as well as a communiqué from the Politburo indicating that real estate sector curbs would be eased, and that  “stability is the top priority”. But economic sleuths should take note.

As I wrote in the New Statesman in September, the government faces a considerable challenge pulling off a soft landing for a sector that isn’t often known for this sort of outcome. In China, the property market is a $60trn sector – or four times GDP – which accounts for about a quarter to a third of annual growth. It faces years of adjustment shaped by a kaleidoscope of excessive debt, rapidly ageing demographics, low marriage and fertility rates, historic overbuilding and the risk of falling prices.

In addition, the Chinese Communist Party’s (CCP) obsession with stability risks making matters worse. Dealing with capital misallocation, bad debt and asset bubbles in property markets means having to recognise and allocate losses. The more you try to “stabilise” the market – and avoid dealing with these losses and inadvertently persist with inflating the bubble – the greater the risk of even bigger financial instability later.

Beijing’s problem is precisely this. It wants to stabilise the market without paying the cost of correcting years of bad policies that produced the bubble. China’s leaders have to choose, now or very soon, between two poor options: deflate the bubble by accepting debt write-offs, bankruptcies and weak growth (or even a recession); or allow inflation to rise and thereby lower the value and burden of debt, which may be no less disruptive as it could entail financial instability, capital flight and a significant depreciation of the renminbi.

Comment: There is also a third option: pretend they want to stabilise the market while chopping it up. Either option, if brought to their logical conclusions, would be more politically unacceptable than fuelling the bubble. After all, what allowed the bubble to grow in the first place is the long series of incentives, which countered any previous attempt to deflate the bubble.

The best example is the property tax, which would deflate the housing bubble while (theoretically) providing another revenue stream for provincial governments (which are critically dependent on land sales). It was never been implemented seriously and it is unlikely to ever be implemented, if only for very limited tests. 

Still, the choice will eventually be forced upon them, as sooner or later it will be too costly to kick the can down the road again.

2.2China needs middle-class growth and consumption to sustain economic success – SCMP

Last year was the fin de siècle for the Communist Party. The party proclaimed it had achieved the first 100-year plan and eradicated absolute poverty. China delivered GDP per capita of close to US$10,500 with some 400 million people now middle class.

Beyond being the world’s largest trading nation, China is now the largest recipient of foreign direct investment. President Xi Jinping announced his ambitious drive to double the economy again between 2020 and 2035, and at the same time he has taken a hard line on the drivers of China’s modern economic rise, the digital economy and the real estate industry.

In parallel with the diplomatic showdowns with the West, China has exposed its own Achilles’ heel: it has clearly lost its labour premium. The country’s fertility rate is the lowest in the 43 years since the one-child policy began. One national newspaper even said that giving birth to three children was a moral obligation for Communist Party members.

Comment: China does indeed need middle-class growth and consumption to sustain economic success, but the issue remains how to get there. While this has been a topic of discussion on more than one occasion, the CCP has to date continued to focus on the supply side. 

As Michael Pettis states in the following thread, supply-side measures to boost production are not enough, as they would only worsen the currently present GDP distribution skewed against households. He suggests reducing the local government share of income in favour of the households but this may be politically unacceptable, as it would require the CCP to relinquish its control over the economy.

2.3 S. Korean economy faces heightened downside risks: KDI – Yonhap News

The South Korean economy faces heightened downside risks, as the country has tightened antivirus measures to curb the spread of COVID-19 cases and the global economic recovery has slowed down, a state-run think tank said Sunday.

Since December, the recovery of private spending has been constrained by tighter social distancing measures to tackle the spike in COVID-19 infections, the Korea Development Institute (KDI) said in a monthly economic assessment report.

“On the external side, global supply chain disruptions and monetary policy shifts by major economies are expected to work as downside risks for the South Korean economy,” the report said.

The upsurge in virus cases and the fast spread of the omicron variant are upping the economic uncertainty of Asia’s fourth-largest economy.

Comment: Omicron may have severe negative consequences due to the speed of contagion. In the Trade section, there is the example of Australia, whose trucking industry has ground to a halt (resulting in severe shortages and related supply-chain pressures). 

2.4Japan’s New Year’s resolutions are bound to fail – FT

[…] Of the numerous exercises that Japan has set itself this year, four stand out. The first is Prime Minister Fumio Kishida’s so-called “Vision for a Digital Garden City Nation” — a wide policy dragnet focused on long overdue efforts to digitise the education and medical systems, and haul other key bits of bureaucratic infrastructure into the digital age. The most ambitious target within this is the plan to recruit, either from its own shrinking and ageing population or from a pool of foreign talent currently unable to enter the country, 2.3m digital experts over the next five years and offer them the dream job of expanding digitisation to the emptying reaches of rural Japan.

A second resolution is to push even harder to establish Tokyo as a talent-magnetising, fund-enticing and regionally dominant global financial centre. This must happen despite the dwindling weighting of Japanese stocks in global benchmarks, a justice system many foreigners now define by the treatment of former Nissan boss Carlos Ghosn and a continuing absence of evidence that anyone outside the Tokyo Metropolitan Government really wants to be a global financial centre.

The third, which has been in the works for a while, is the great reorganisation of theTokyo Stock Exchange in April — an exercise intended to whip (via new standards) sprawling paunch of 2,185 names currently listed in the First Section into a more investable, higher-quality six-pack of “prime” stocks. Landmark, line-drawing stuff in theory, but qualification for “prime” has been diluted since its conception. Companies That do not meet governance, free-float and other criteria now will be able to join anyway as long as they promise to meet them at some deadline-free point in the future. The Nikkei recently reported that some 90 per cent of current First Section companies will make it into the leaner, meaner prime market.

A fourth pledge of national self-improvement is to establish what is tentatively being called the International University of Excellence and is a project aimed at puttingJapan’s research universities on a par with global peers. The funding will partly come from the newly-created ¥10tn university fund which is scheduled to begin investing in the coming months.

In common with anyone’s January gym-joining, the stated ambition and early enthusiasm is laudable. The question, as ever, is how long all that is sustained beyond the first pulled muscle and as excuses for postponement become more attractive. But of greater concern for Japan is that, even if sustained, the incremental good these projects will do is now in long-term decline. Asahi is changing its recipe in desperation because beer consumption has been falling in Japan for nearly two decades — a slump that matches the relentless decline of the younger population. Fitness may be possible; ageing is unstoppable.

Comment: Japan, under Kishida, is once again trying to put an end to the Lost Decades, the aptly named period which came after its crash of the early ‘90s. Given that an entire generation has grown up without having witnessed Japan in its prime, it is unlikely to bring a meaningful change, especially given the demographic problem. While not exclusive to Japan, it is particularly severe in their case. 


3.1 Housing crash, when it comes, will last for years – AFR

After notching the fastest annual price growth in decades last year, Australia’s biggest housing markets now face the prospect of falling prices that could last for years, if past downturns are any indication.

With many economists and property experts predicting house prices to peak later this year, there are worries the downturn could be more severe and longer this time around.

“Once a market peaks, the typical trend is that values will experience a period of decline. But it’s impossible to know the timing, duration or magnitude of the housing downturn as it depends on so many factors, especially at the moment with so much uncertainty,” said Tim Lawless, CoreLogic research director.

“It’s likely that interest rates will normalise over several years rather than a rapid return to average levels which should help to cushion the size of any housing downturn, but if credit policies become overly restrictive, it could amplify the downside.

“Arguably, the surge in COVID-19 cases associated with the omicron variant could push some of these policy tightening decisions back, with APRA or the RBA unlikely to tighten their policy settings with so much uncertainty associated with the latest case numbers.”

Comment: While this is centred around the Australian housing market, it is generally true in many other countries. Given that housing was the trigger for the ‘07 crisis, and so many others in the past, time will tell whether a retreat in prices would have severe broader implications. 

3.2Shimao puts residential projects on sale as China property woes deepen – Reuters

Shimao has put all its projects on sale, local media reported, as Chinese property developers face mounting pressure to negotiate with their creditors to ease a liquidity squeeze in the sector that is threatening to push more firms into default.

[…] The Shanghai-based property developer has struck a preliminary deal with a Chinese state-owned company to sell its Shimao International Plaza Shanghai, a commercial property on Shanghai’s Nanjing Road, for more than 10 billion yuan, the report said.

Comment: Considering Shimao put everything on sale, coupled with all the other issues impacting the property sector, the authorities will have a hard time stemming the bearish tide. After all, there is only so much the state-owned companies can do to absorb the unfinished projects


4.1 Indonesia holds talks with industry on coal distribution problems, export ban – CNA

Indonesia is yet to reach a decision on lifting its coal export ban as authorities discussed overcoming logistic issues that have slowed efforts to distribute coal to domestic power plants, a mining group executive said on Sunday.

The world’s biggest thermal coal exporter suspended coal exports on Jan. 1 after Indonesia’s state power utility reported dangerously low inventory levels of the fuel, putting Southeast Asia’s biggest economy on the brink of widespread power outages.

The move had sent global prices of the fuel up last week with international buyers monitoring closely discussion between Indonesian authorities and the local coal industry. An energy ministry official had pledged to review the ban after Jan. 5

Indonesia’s Coordinating Ministry of Maritime and Investment Affairs met with miners and other related industry again on Sunday, but has not made any decision yet regarding resuming exports, said Hendra Sinadia, executive director of Indonesia Coal Miners Association.

Comment: Despite the talks, there is still no end to the ban in sight. If it were to continue, there would be further upward pressures on energy prices in the region (especially in China and Japan, two major importers) and potentially energy shortages, as happened in China last year. 

For this very reason, calls on Indonesia to lift the ban have increased. The latest comes from the Philippines, which joined Japan and South Korea in targeting the ban. Japan’s ambassador to Indonesia, Kenji Kanasugi, sent a letter dated Jan. 4 to Indonesia’s Ministry of Energy and Mineral Resources calling for the ban to end. Tokyo repeated the same message on Monday, when Minister of Economy, Trade and Industry Koichi Hagiuda, who is currently in Jakarta, met with Tasrif.

At the same time there is a potential winner in all this: Australia. Down Under is one of the major producers of coal and it would not be logistically challenging sourcing from Northern Australia rather than Borneo, the island in Indonesia with the most coal. It would require time however, leaving the afore-mentioned countries vulnerable to shirtterm disruptions.


5.1 Two Chinese Startups Tried to Catch Up to Makers of Advanced Computer Chips—and Failed – WSJ

China has spent billions of dollars in recent years trying to catch up to the world’s most advanced semiconductor makers.

Two foundry projects, led in part by a little-known entrepreneur then in his 30s, help show why China has yet to succeed.

The projects, in the Chinese cities of Wuhan and Jinan, were supposed to churn out semiconductors nearly as complex as the more-sophisticated chips made by industry leaders Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. , which have decades of chip-building experience.

Chinese officials kicked in hundreds of millions of dollars to support the upstarts. But it quickly became clear the plans had been too ambitious, and local officials had underestimated how difficult—and costly—it is to make complex high-end chips.

The two foundries, Wuhan Hongxin Semiconductor Manufacturing Corp. and Quanxin Integrated Circuit Manufacturing (Jinan) Co., burned through cash, yet never commercially built any chips.

HSMC formally shut down in June 2021. QXIC still exists but has suspended operations, and didn’t respond to requests for comment.

Comment: The semiconductor shortage, coupled with how much the world is dependent on very few producers (mostly Taiwanese), has sparked several attempts to increase production internally. The article in question cites one of the Chinese responses, focused on the high-end chips (almost exclusive purview of TSMC and Samsung). That failed, with the authorities now focused more on mature technologies.

All in all, the new strategy from China resembles the one taken by Japan, which has focused on mature technologies from the get go. While it will take some time for it to come to fruition, as the various fabs planned after the implementations of the subsidies will take a few years to become operational, it seems to be the better course of action.

India, another key country in the region, is also following Japan’s step, after announcing additional subsidies in December. It is a large market, expected to reach $100 bn by 2024, but with very limited production internally, primarily focused on the state-owned aerospace and defence industry. 

There is however an issue which may hamper everyone’s drive towards homegrown production: the lack of qualified workers. As of now, the pool of people capable of staffing the fabs is very limited, to the point of already having bidding wars between employers. 

This particular issue will take many more years to resolve, either because more people decide to go down this path in education or because the worker shortage pushes for increased automation (or a combination of both). Regardless, it will take a long time to clear the shortage, especially with demand increasing. 

5.2 Murata’s Thailand move heralds Japan tech shift from China – Nikkei Asia

Murata Manufacturing and other Japanese tech suppliers are cutting their dependence on China as the U.S.-China standoff deepens.

The world’s largest capacitor maker and an iPhone parts supplier, Murata said in November that it will open a new plant in Thailand in October 2023. In an interview with Nikkei Asia, Murata President Norio Nakajima said the new plant will eventually be expanded to become as large as the one in Wuxi, near Shanghai, where Murata produces multilayer ceramic capacitors for consumer electronics.

Murata Manufacturing, which has depended on greater China for over half of its revenue, expects the share to go down over time as the company looks to Indo-Pacific for future growth. It is an example of Japan Inc. trying to deal with geopolitical risks amid U.S.-China rivalry.

“There is a risk of events happening beyond our control,” such as Washington imposing a technology ban on China, Nakajima said. “It is imperative to diversify our supply chain,” he said, adding that its key customers like Apple are also diversifying away from China. Murata used to symbolize the enduring economic ties between Asia’s two largest economies, but the U.S.-China trade rift has left business leaders like Nakajima nervous.

Murata is not just responding to the trade war. It is also looking at long-term demographic trends.

Comment: This ties into the following piece, about how the current dispute between the US and China is shaping globalisation.  


6.1 The Growing Rivalry Between America and China and the Future of Globalization – TNSR

Since the end of the Cold War, political, business, and opinion leaders in the advanced industrial democracies have tended to accept as an article of faith that expanding cross-border flows of goods, capital, information, ideas, and people are inevitable, irreversible, and, for the most part, positive developments. It has been widely believed that globalization, the ever-closer integration of the world’s economies and societies, would lead to improvements in efficiency, rising levels of income and well-being in all nations, and a narrowing of the gap in living standards between rich and poor countries. These tendencies, in turn, would promote cross-cultural understanding, encourage the spread of liberal democratic norms and institutions, and enhance the prospects for international cooperation and peace. Even if these broader political benefits were not immediately forthcoming, it has still generally been assumed that the process of globalization would continue, driven forward by technological progress, market forces, the pursuit of profits, and the relentless logic of competition.1

In the last several years, a number of developments have begun to call these assumptions into question. First, the rise in nationalist, populist, anti-immigration, and protectionist sentiments in a number of advanced industrial nations have raised doubts about the durability of popular support for continued economic and societal openness.2 The recent COVID-19 pandemic has also served to highlight the risks of relying on complex, widely dispersed production networks that may be efficient in normal times but could prove fragile in the face of natural disasters or disruptive political events.3 Finally and, for our purposes, most important, the growing friction between the United States and China over trade, investment, and technology, and their intensifying military, diplomatic, and ideological rivalries have raised the prospect of “decoupling” between the world’s two biggest economies.4 After decades spent promoting engagement with China, U.S. policymakers have begun to question its net effects on the nation’s long-term welfare and security.5 Concerns about the potentially harmful impact of China’s economic policies, its repressive political system, and its increasingly aggressive external behavior are also causing a reexamination of existing ties in other advanced industrial democracies, both in Europe and Asia.6

These developments serve as a reminder that, while economic and technological factors are important, politics will ultimately play the decisive role in determining the future of globalization. With that insight in mind, the purpose of this article is to consider the ways in which the intensifying rivalry between the United States and China may influence, and be influenced by, the evolving structure of the international economy. I begin with an overview of the academic literature on the question of the interrelationship between the distribution of power within an international system and the pattern of economic relations among its members. This is followed by a discussion of the evolution of the international economy over the last two centuries, a period that encompasses what can best be described as two and a half eras of globalization.

In closing, I examine five alternative scenarios for the evolution of the global economy, offering a judgment about the probability of each occurring, as well as an assessment of its implications for American power and prosperity. In brief, I argue that, although the post-Cold War era of U.S.-led globalization is coming to a close, and previous trends toward increasing integration (“Reglobalization”) are unlikely to reassert themselves, neither the total collapse of the world economy (“Deglobalization”) nor the creation of a new, Chinese-led global system (“Globalization 3.0”) is probable, at least for the foreseeable future. What seems more likely is the emergence of partially closed trading blocs organized either geographically (“Regional blocs”) or around shared strategic interests and common political values (“Value-based blocs” or “Globalization 2.5”). Of these two possibilities, the last is clearly the most desirable from an American perspective. Abandoning the dream of a fully integrated world economy, the object of U.S. policy should therefore be to reconstruct a partial liberal trading system, much like the one put in place during the early years of the Cold War.

6.2 Close contact rules eased for essential workers – AFR

NSW and Queensland have seized the initiative to end crippling supermarket supply shortages by slashing isolation rules, as the federal government considers easing rules for workers in sectors including aviation, essential services and childcare to stop the economy grinding to a halt.

Prime Minister Scott Morrison met with senior ministers and top bureaucrats late on Sunday for an update on the crisis after health officials discussed how workers who are deemed close contacts of people with COVID-19 could be allowed to return to their jobs despite potentially being exposed to the coronavirus.

While business backed the NSW and Queensland changes, unions warned it could backfire and spread the virus, forcing workplaces to shut down. Other states are expected to follow and ease essential worker restrictions.

Comment: More and more countries have shown the correlation between the number of cases and the number of severe cases has somewhat weakened as of now. Regardless of the actual reason for this, as it is besides the point, policymakers should ponder whether it makes sense to use the same restrictions as in the past ,given the paradigm shift. 

After all, the supply chain shortages Australia is now facing are a consequence of their own policies and they have to evaluate whether such a cost is too great for the benefit.

Australia is not the only country being hit, as China too has been having similar disruptions. Once again its impacts are mostly seen in the commodity markets, with one example being lithium.

6.3UK trade minister to launch FTA talks in Delhi next week – Financial Express

Britain’s Secretary of State for International Trade Anne-Marie Trevelyan will launch Free Trade Agreement (FTA) negotiations during a visit to New Delhi starting on Wednesday, the UK government has said. The schedule for the two-day visit to India will include bilateral talks between Trevelyan and Commerce and Industry Minister Piyush Goyal on Thursday, the Department for International Trade (DIT) said on Sunday. Trevelyan and Goyal are expected to discuss a range of issues, including green trade and the removal of market access barriers for both UK and Indian businesses, DIT said.

Both ministers are then expected to confirm the launch of official negotiations on a new UK-India FTA.”The UK and India are already close friends and trading partners, and building on that strong relationship is a priority for 2022,” said Trevelyan.

“I will be using my visit to drive forward an ambitious trade agenda which represents the UK’s Indo-Pacific tilt in action and shows how we are seizing global opportunities as an independent trading nation,” she said.”This is just the start of a five-star year of UK trade, forging closer economic partnerships around the globe and negotiating deals that work for businesses, families and consumers in every part of the UK,” she added.

On Thursday, the UK minister will join Goyal to co-host the 15th UK-India Joint Economic and Trade Committee (JETCO) to review how businesses in both countries are benefiting from existing market access commitments under the UK-India Enhanced Trade Partnership agreed last May by Prime Ministers Boris Johnson and Narendra Modi.