Asia Pacific Macro – May 2, 2022

| May 2nd, 2022

As we wait for tomorrow’s policy decision from the RBA, we cover the elephant in the room which is the lost credibility of this institution due to the abject mistakes made in the past (which ultimately led to the market forces to tighten for them). Underestimating inflation is one of the factors involved, and one that has been causing havoc all across the region (as we will see in other articles). Also covered is the state of the Chinese economy, with the official PMIs signaling a contraction second only to the start of the “people’s war” on Covid, back in February 2020.


1.1 Reserve Bank must be made accountable for inflation mistakes – AFR

Both major political parties support an external review of the Reserve Bank of Australia (RBA) after the election. What should that review examine?

Media reports have focused on the RBA’s inflation target of 2 to 3 per cent. Some commentators argue for a higher target, some for a lower. Others propose replacing this target with a different variable, such as nominal GDP.

These questions are worth considering, but they are not the main issues facing the RBA.

For most of the past decade, the RBA has been unwilling or unable to attain its targets. Underlying inflation fell below 2 per cent for over five years – and would have done so for longer if not for the pandemic.

So resetting the target is beside the point. It is like a cricket coach telling a bowler which stump to aim at when the bowler can’t even land the ball on the pitch.

The central issues the review needs to examine are questions of governance. Why did the RBA persistently miss its target and how can that be avoided in future?

Comment: For some time, the RBA has made policy mistakes that forced the institution into the following dilemma: either to hike rates earlier, and follow the market forces hinting towards an early hike, or keep the status quo, risking yet another tantrum and loss of credibility.

After all, the decision tomorrow is more about credibility rather than rates, as the market has for all intents and purposes hiked for them. For example, property prices in Sydney have been falling for three consecutive months, with auction clearances falling to new lows. The primary culprit for this is the expected rate hike. This is seen as positive by former Reserve Bank of Australia governor Ian Macfarlane, who is of the opinion that price must fall for the sake of the younger generations.

However, there is also the political concern: the RBA has not hiked during an election campaign since 2007, where the hike played a factor in the outcome. This, coupled with the wage data coming later this month, may nudge the central banks towards maintaining the status quo.

If so, they need to be very careful in the wording, as inflation is already eating away at wages, and especially when it comes to non-discretionary (e.g. food and other essentials).

Sure, there is little the RBA could do to address several of the underlying causes, but defending what is left of the credibility (or regaining it) is of the utmost importance.

There are also differing opinions with regards to what the RBA should do:

·         In the no-hike camp, for example, there is former RBA economist Paul Bloxham, now chief economist at HSBC for Australia. He bases his opinion on the wage number and on the assumption the RBA took into account an upside surprise in inflation. Given that they were bullied away from the ‘no rate hike until 2024’ position they previously had, it is difficult to envision (hence the issue of credibility)

·         On the other extreme, Warwick McKibbin, who was a board member of the RBA in the fateful 2007 rate hike during the elections, argued for a substantial rate hike. Ultimately, he puts the blame on the excessively loose fiscal and monetary policy, arguing for a 40 bps tomorrow and a clear path of interest rate increases, subject to adjustments as information like wage data becomes available

Following Nicholas Glinsman, who said time and again he did not trust this Fed, there is little reason to be trusting of the RBA.


2.1  Indian economy will take 15 years to overcome Covid losses, says RBI report – India Today

The Reserve Bank of India on Friday released the Report on Currency and Finance (RCF) for the year 2021-22. The report stated that it will take the Indian economy 15 years to make up for the losses incurred due to the pandemic.

The latest RBI report paints a grim picture of the Indian economy. The theme of the report is ‘Revive and Reconstruct’ in the context of nurturing a durable recovery post-Covid and raising trend growth in the medium-term.

According to RBI, the country now needs to focus on seven wheels of economic progress – aggregate demand, aggregate supply, institutions, intermediaries and markets, macroeconomic stability and policy coordination, productivity and technological progress, structural changes and sustainability.

The report states that for the country to hop on to a strong and sustainable growth path, price stability is a necessary precondition.

Reducing general government debt to below 66 per cent of GDP over the next five years is important to secure India’s medium-term growth prospects.

Reserve Bank of India Governor Shaktikanta Das, in the foreword to the report wrote, “It was not sufficient to just stabilise the economy and return it to its pre-first wave path.” The task at hand, according to Das, was to create a virtuous cycle of greater opportunity for entrepreneurs, businesses, and the fiscal authority.

For the country to get the economy back on track, a feasible range for medium-term steady state GDP growth works out to 6.5 8.5 per cent, which is consistent with the blueprint of reforms.

Comment: The RBI report laid out the steps for a ‘return to normal’, highlighting risks involved therein.

The first is the large surplus liquidity, with the RBI saying “monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory”.

The second big obstacle is debt, or more specifically, making it sustainable. In the report they say the following: “A medium-term strategy of debt consolidation aimed at reducing debt to below 66% of GDP over the next five years is, therefore, important to secure India’s medium-term growth prospects”

This is definitely a challenge, as India’s debt-to-GDP ratio, including debt of the Centre and states, was 89.6% in FY21 and the International Monetary Fund (IMF) has projected that it will rise to a record 90.6% during FY22.

Finally, the RBI suggested a series of structural reforms in order to revive and restructure the Indian economy, ravaged by the pandemic. While acknowledging the government’s announcements in the areas of privatisation, tax reforms, the production-linked incentive (PLI) scheme, insolvency legislation, labour reforms and its focus on capex and infrastructure, the RBI advocated the use of further measures to reverse the sustained decline in private investment and low productivity in the economy.

The structural reforms suggested by the central bank include enhancing access to litigation free low-cost land, raising the quality of labour through large-scale expansion of public expenditure on education, health and the Skill India Mission, as also reducing the cost of capital for industry and improving resource allocation in the economy by promoting competition.

The main spectre India has to stave off, as said by Hindustan Unilever (HUL) managing director and chief executive Sanjiv Mehta, is stagflation. Quoting:

“Inflation is certainly having an impact on consumption, and we must ensure that we do not get entrapped by stagflation. It would be a tightrope walk for the Reserve Bank (of India). They will have to ensure that there is sufficient liquidity, and growth is not constrained, but at the same time there is no runaway inflation”

There are also some mixed pieces of news on the state of the economy: on the one hand, there is a rise in unemployment, especially in urban areas, while on the other hand manufacturing activity has picked up last month, with the relevant PMI rising to 54.7 in April from 54 in March.

With this said, India is not the only country facing some trouble and, compared to the one coming next, it seems to be in a better shape overall.

2.2 China risks falling behind U.S. growth rate as lockdowns take toll – Nikkei Asia

China’s zero-COVID policy is putting increasing strain on business activity, with some analysts warning the nation’s economy could see real growth for 2022 only in the 3% range, possibly putting it behind the U.S. level.

The monthlong-plus lockdown in Shanghai is the epicenter of the economic disruptions. New infections are declining, but more than 40% of residents are still prohibited from leaving their homes, disrupting logistics. In the manufacturing sector, new orders and production declined, while prolonged procurement times for parts and raw materials have taken a toll.

The effect is being felt beyond China. Japanese companies are also struggling to cope with the situation.

The impact has been felt by Japanese companies in a wide range of industries. Yaskawa Electric, a major industrial robot supplier, has kept its Shanghai inverter factory shut since early April, forcing employees to stay home.

Production in Japan has also begun to suffer. “The impact is far more severe than could have been imagined,” a Subaru executive said. Disruption to parts procurement from China forced the automaker to shut down three Japanese plants, including its main plant in Gunma Prefecture, for two days from Thursday.

Non-manufacturers are also struggling. Fast Retailing has approximately 860 Uniqlo stores in mainland China. Recently, between 130 and 140 stores, including 86 in Shanghai City, have closed temporarily due to COVID-19.

Seven-Eleven also has about 140 of its 1,300 stores in mainland China, almost all of them are in Shanghai in addition to a handful in Beijing and airports. All were closed as of Thursday.

On Saturday, China’s National Bureau of Statistics released the Manufacturing Purchasing Manager’s Index and the Non-Manufacturing Business Activity Index for April. The manufacturing sector was 2.1 points lower than the previous month at 47.4, while the non-manufacturing sector was 6.5 points lower at 41.9.

Comment: Details of the official PMI report suggest service and manufacturing activity may slow further — a negative signal for China’s growth and global trade.

–       New manufacturing orders slid to 42.6 from 48.8 the prior month. Export bookings fell to 41.6 from 47.2.

–       This indicates a steep pullback in demand and is a likely harbinger of more production declines to come.

–       New orders in the service sector fell more steeply, sliding to 37.4 from 45.7 in March.

–       The gauge of current manufacturing production slid more sharply than the headline figure, dropping to 44.4 from 49.5 in March.

The contraction in the official PMIs is severe and for the most part due to the various restrictions put in place. In fact, the drop is second only to the one experienced in February 2020, when the “people’s war” on Covid started (more on this and its political implications in ‘Xi’s “People’s War” on Covid’), showing that the playbook has changed.

Now, Xi et al view as more important holding the line on Covid, despite the costs, rather than strive for a balance between controlling the pandemic and giving the economy some respite. In fact, despite the brief respite, Shanghai immediately got a setback with an uptick in cases outside of the lockdown areas. Meanwhile, mass testing is continuing in Beijing, with the threat of a lockdown looming over its citizenry.

All this has ramifications, not only for the supply chains but also for the millions of young Chinese who will graduate. Already, the National Bureau of Statistics prints a youth unemployment of 16%, which hampers the future prospects of the economy.

Then of course there is the ever present central planning, which can be exemplified by the National Development and Reform Commission (NDRC) warning against ‘price-pushing behaviours’ and the renewed attention to ‘disorderly expansion of capital’ from Xi himself.

Given all this, it is difficult to believe a growth even remotely close to the 5.5% target, which begs the question: which of the conflicting objectives will Xi and the Standing Committee drop? As of now, the most likely target to be dropped is the 5.5% growth, unless they get really creative. Is of the same opinion Leland Miller, of ChinaBeigeBook.

2.3 China meets banks to discuss protecting assets from US sanctions – Financial Times

Chinese regulators have held an emergency meeting with domestic and foreign banks to discuss how they could protect the country’s overseas assets from US-led sanctions similar to those imposed on Russia for its invasion of Ukraine, according to people familiar with the discussion.

Officials are worried the same measures could be taken against Beijing in the event of a regional military conflict or other crisis. President Xi Jinping’s administration has maintained staunch support for Vladimir Putin throughout the crisis but Chinese banks and companies remain wary of transacting any business with Russian entities that could trigger US sanctions.

The internal conference, held on April 22, included officials from China’s central bank and finance ministry, as well as executives from dozens of local and international lenders such as HSBC, the people said. The ministry of finance said at the meeting that all large foreign and domestic banks operating in China were represented.

Comment: HSBC did not respond to a request for comment, which requires a bit more context. HSBC, due to its historic ties to both the UK and China, is right in the middle of the current clash and has one in its own backyard.

Ping An, one of the biggest insurance companies in China and a shareholder of the bank, is seeking a shareholder vote to split the bank’s business into two distinct operations: one for China and one for the West. This conflict had to happen, as the structure of HSBC has been a topic of controversy for three decades but has come into focus after tensions between the West and China mounted following the imposition of a national security law in Hong Kong in 2020.

HSBC also perfectly exemplifies all the businesses currently stuck between the two blocs: as it is impossible to comply with both Chinese and Western regulators at the same time, given the conflicting nature of the demands, HSBC and others inevitably endure a backlash for one side or another.

With regards to this aspect, splitting HSBC could potentially make sense, but it is easier said than done. Same can be said on a broader scale, as the aforementioned article from the FT shows. China was not able to find a solution to its problem, which is a symptom of a much larger structural problem.

In this regard, Michael Pettis wrote a long and informative Twitter thread, which we will summarise briefly. Given the large trade surplus, China has no choice but to acquire foreign assets, and has no choice but to run large trade surpluses as it is unable to rebalance domestic demand.

He then suggests that all this could be prevented by preventing the net acquisition of US assets by foreigners, as this would force countries running trade surpluses to choose either surging unemployment or boosting internal demand. Whether this can be done in practice is difficult to say, as the changes such a course of action requires are extensive.

2.4 Over 40% of Japanese firms to raise prices within a year: survey –  Kyodo News

Over 40 percent of Japanese companies are raising prices within a year amid rising material costs caused by the COVID-19 pandemic and Russia’s invasion of Ukraine, a survey by a credit research firm showed.

In the Teikoku Databank Ltd. survey of 1,855 companies in Japan conducted in early April, 43.2 percent of the firms said they raised prices this month or plan to do so by the end of March next year.

When combined with the companies that have already increased prices between October and March, the percentage reaches 64.7 percent of the total, Teikoku Databank said.

However, 16.4 percent said they are unable to pass on the higher costs to customers even though they want to.

Only 7.4 percent had no plan to increase prices within a year.

A growing number of Japanese companies are selling their products at a higher price in a country that has experienced years of deflation, as the pandemic and Russia’s ongoing invasion of Ukraine have caused the cost of everything from wheat to crude oil to rise.

“We cannot keep running the company unless we raise prices” as various costs are increasing, a food manufacturer in Hokkaido, northern Japan, said, according to the survey.

While some industries such as steel, chemical goods and food manufacturing are relatively willing to pass on higher costs, those that face severe price competition, such as transportation companies and hotels, remain hesitant, the research firm said.

Comment: The BOJ itself is of the opinion that inflation will continue to face upward pressure later this year from rising electricity bills and food prices, which are some of the causes for the price hikes from the companies. At the same time, however, they have not considered inflation as a priority, having focused all their attention on defending the bond yield target.

With this said, there is a silver lining amongst the clouds, as a Cabinet Office survey showed the sentiment index for general households, which includes views on incomes and jobs, was at 33.0 in April, up slightly from 32.8 in March. The movement is of course very limited, but it is the first improvement in six months.

2.5 Supplementary budget, inflation biggest tasks for finance minister nominee – Korea Times

Finance Minister nominee Choo Kyung-ho pledged to place his economic policy focus on stabilizing prices and executing supplementary budgets in time, according to his written statement submitted to the National Assembly, Sunday.

“Prices will see an upward trend for the time being, and the current economic situation is very grave,” he said in the statement ahead of his upcoming confirmation hearing.

The remark came amid escalating inflationary woes here and abroad. Korea’s consumer prices rose in March by more than 4 percent for the first time in a decade, according to recent data from the Statistics Korea.

The general consensus here is that the prices index for April will show a gradual rise on global energy price hikes and a series of multiple economic uncertainties ― such as the rising won-dollar exchange rate and the lifting of social distancing rules.

“We need to deal with external risks for the price stabilization, and (the incoming administration) will seek to stabilize the livelihoods of the people as soon as possible,” Choo said.

He also underscored the importance of the authority taking appropriate measures to stabilize supply and demand in energy, raw materials and global grains, as part of its top priority to curb inflation here.

The finance minister nominee went on to say that he would take into careful consideration the details over its plans to execute the large-scale supplementary budget, in a move to provide financial support to those hit by the economic effects of the prolonged pandemic shock here.

Comment: The upcoming government has its work cut out for it, for several reasons. For example, the trade deficit has further widened to $2.66 billion, up from a deficit of $140 million the previous month. This is because imports have risen 18.6% on-year to $60.35 billion while exports have grown 12.6% to $57.69 billion.

The main culprit is energy, which makes this particular issue very important. On this point, South Korea is not alone, as countries like Singapore have been facing the same problem. Hence there is the focus on stabilising the economy, although it is easier said than done.

The difficulties not only have an economic nature, but also a political one: Prime Minister nominee Han Duck-soo, who focused a lot on stabilisation in his confirmation hearing, was rescheduled for this week after last week’s hearing fell apart due to boycotts by the ruling Democratic Party (DP) and the Justice Party.

Ultimately, this is one of the signs showing how difficult it will be for the current government to enact changes, a subject we covered in the immediate aftermath of the vote in South Korea (see ‘A new South Korea after the election – perhaps’ for more).

2.6 Broke, downgraded and begging: Sri Lanka pays price for missteps – Nikkei Asia

Sri Lanka’s failure to settle interest payments on sovereign bonds and its subsequent ratings downgrade have drawn unflattering comparisons with the economic meltdown in Lebanon.

The South Asian nation on April 18 failed to pay interest of $78.13 million on $1.25 billion of bonds. Standard & Poor’s followed up this week with a downgrade to a “selective default” rating — the latest knife in the back of the debt-ridden economy.

Foreign investors who had bought the island’s international sovereign bonds (ISBs) were angry that they were misled by promises the debt would be paid. The principal cheerleader was Nivard Cabraal, the then central bank governor. Throughout he stood by views he had expressed to Nikkei in a February interview: “I am determined to pay [ISB holders.]”

“The market was expecting the April 18 coupon to be paid because of assurances by government officials that funds were available,” a London-based emerging markets investor holding Sri Lankan ISBs told Nikkei Asia. But it was “an illogical promise, Lebanon-level illogical,” he added, referring to the Middle Eastern nation that defaulted on its foreign loan payments in 2020.

Sri Lanka’s financial authorities informed international lenders a week before the coupon payment that the country was strapped for foreign reserves. In an $81 billion economy, those reserves had slumped to $200 million, money that is now critical to buying food and other necessities.

That made the country, which must settle foreign debt of $6.9 billion this year, a sovereign defaulter for the first time.

Comment: We have been covering Sri Lanka’s downward spiral since early on, and the situation does not have any sign of meaningful improvement. There are still shortages in the country, although Colombo has designated seven essential goods categories for imports from India, using the credit lines New Delhi extended. These products include essential food items, medicines, cement, textiles, animal fodder, raw materials for key industries and fertilisers.

Meanwhile, protests are continuing in the country, with rallies against the government’s handling of the crisis. As of now, there are no signs of a change in the government, with the Rajapaksa brothers staying put. It may be however difficult for them to cling onto power long term, especially if the current crisis endures.

2.7 Saudi, Pakistan to discuss possible support for kingdom’s $3 billion deposit – Reuters

Saudi Arabia and Pakistan will discuss the possibility of supporting the kingdom’s $3 billion deposit in Pakistan’s central bank by extending its term “or through other options,” a joint statement carried by Saudi state news agency SPA said on Sunday.

Last year, Saudi Arabia deposited $3 billion in Pakistan’s central bank to help support its foreign reserves. With a yawning current account deficit and foreign reserves falling to as low as $10.8 billion, the South Asian nation is in dire need of external finances.

Comment: Pakistan is the other country in major trouble, with inflation having hit a two-year high in April (topping 13.37%). The boost from the $3 billion deposit would bring an immediate relief, as the forex reserves have been dwindling, but there is no long-term solution in sight.

For example, the current government decided to keep the energy subsidies unchanged, despite the objections from the IMF. While this decision may cause trouble with the IMF, as Islamabad has been seeking financial assistance, the decision was a forced one: removing the subsidies in the current environment could cause more economic damage than the potential benefit from an IMF aid package (especially taking into account the deep divisions within Pakistan, subsequent to the political conflict between the current government and the previous one).

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