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Asian Focus: China's growth struggle vs. Japan's inflation wish
In this special Asian Focus video Yvette Roper of TradingFloor.com interviews both Andrew Robinson, FX Analyst for Saxo Capital Markets in Singapore and Steen Jakobsen, Chief Economist, Saxo Bank, Copenhagen. They discuss the health and future scenarios of the region’s two dominant economies - China and Japan - based on their respective ‘insider looking out’ and ‘outsider looking in’ perspectives.
China is seen continuing to struggle with its role as a production hub for the rest of the world where growth is slowing. This is an issue particularly because the Chinese economy almost entirely bases its competitiveness on a weaker currency and low unit labour costs which will be increasingly threatened by moves to robotics and other technology. Therefore it will be interesting to see how China’s plans to increase government consumption, speed up infrastructure projects, reduce taxes, allow private investment in public projects can help boost growth that much. It’s a planned economy and per definition it should work, however political turmoil there is being underestimated by markets, says Steen.
Despite China’s Premier Wen being very vocal about such initiatives, even though he is stepping down in a few months, the market is growing very tired of his comments. Market reaction lasts only about 24 hours and the biggest problem is that even when the action comes the impact on the economy won’t be that great, says Andrew.
Also of interest is the many reserve requirement ratio cuts in China of late which are not really filtering through to society with little lending happening so far. Furthermore, inflation is a bit of an issue in China with hefty wage pressure costs coming through the pipeline. It’s very much a tug of war between the two sides of the equation, says Andrew adding that even though more cuts are on the way any direct impact on the economy is difficult to tell.
On Japan, focus is largely on how the implementation of inflationary targeting will be met and not on any recent ratings downgrades. Nor is it on the dire nature of its massive debt to gdp ratio (close to 250 percent) as while Japan effectively pays zero percent in interest the situation remains sustainable. Japan’s bonds, currency and other asset classes continue to remain strong amid this environment largely due to the dominance of Japanese ownership which is ingrained into the society. Of interest will be how Japan switches from deflation to inflation with a target of 1 percent. What essentially also needs to change is the perception of inflation in Japan, with its safe haven status largely being a reflection of the fact that inflation is positive for currencies.
On currencies, for the two nations the preferred path is obvious, or as Steen aptly puts it: “Everyone wants China to have a stronger currency and Japan to have a weaker one to spur growth.” He sees the yen beginning to weaken over the next 10 to 15 years reflecting that Japan will be coming back into the world market as an engine while China's currency will continue to weaken.
And on the yuan, its continued weakness against the US dollar is not as simple as Chinese authorities just trying to keep it low to boost the country’s exports. There’s a general corporate market shortage of dollars in the region and a lot of Asian currencies being sold against the US dollar, says Andrew.
Meanwhile, the near-term effect of the recent opening of an extra yuan facility near the Myanmar border (in addition to Hong Kong) won’t have a great impact on Asian regional trade. Furthermore FX trading in the yuan is hardly just around the corner. Authorities always said they will open up markets as and when it suits them and there’s no inclination it’s in their interests to do so at the moment, says Andrew.
See more of Andrew's Asian market commentary on TradingFloor.com
For more comments by Steen Jakobsen see his blog Steen's Chronicle on TradingFloor.com
13:45 minutes
Tags: banks, central, china, debt to gdp, fiscal policy, forex, jakobsen, japan, monetary, myanmar, policy, premier wen, robinson, roperandrew, rrr, steen, tradingfloor.com, usdjpy, yuan, yvette