Group Economics Emerging Markets
Asia outlook
Arjen van Dijkhuizen, +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
Sailing stormy waters
24 August 2015 • • • • •
China-related concerns (stock market correction, CNY devaluation, growth outlook) trigger capital outflows. Still, the adjustment of China’s exchange rate regime makes economic sense, while we do not expect a currency war. We lowered our growth forecasts for South Korea, Singapore, Taiwan and Thailand, also given weak export performance. With China’s economy slowing gradually, we expect regional growth to fall to 6.2% in 2015 (2014: 6.4%). Key risks to the outlook: China hard landing, rising risk aversion and further capital outflows in the run-up to the Fed liftoff, FX-related risks, lower growth in advanced economies, high domestic debt levels and geopolitical issues.
China concerns keep grabbing the headlines Over the past months, concerns regarding China contributed to further capital outflows out of EMs including emerging Asia, while hitting a broad range of market prices including commodities and EM FX. The sharp correction of the Chinese stock market in June/July and the subsequent range of unorthodox measures to stabilise markets have fed doubts about the government’s real capability to steer towards desirable outcomes. Subsequently in mid-August, when the stock market dust had hardly settled, the PBoC adjusted the USD-CNY fixing rate by around 4.5%, triggering a CNY depreciation of some 3% so far. These moves caused broad market turmoil, as China growth concerns rose further, while some accused China of starting a competitive devaluation.
Adjusting an expensive peg Real effective exchange rate, index, 1 Jan 2013 = 100
120 115 110 105 100 95
While we do not expect a full-blown currency war, … Although we expect some more moderate CNY weakening in 2015 and 2016, we do not think that the yuan devaluation will trigger a full-blown currency war. First, the steps taken so far are not very aggressive. Second, we expect the CNY to remain a heavily managed currency, as the authorities aim to avoid too sharp a depreciation. Third, other countries seem to recognise that the Chinese economy faces challenges and have reacted in a (relatively) benign fashion so far. … we have adjusted our Asia FX forecasts downwards Still, the CNY devaluation has impacted other Asian (and other EM) currencies. Currencies from countries with relatively large exports to China or countries that compete relatively strongly with China on third markets have come under pressure, such as the Korean won, the Singapore dollar and the Taiwan dollar. Although less exposed to China, the Indian rupee has also been affected by contagion. For the Indonesian rupiah, the Malaysian ringgit and the Thai baht, the CNY devaluation has strengthened a longer lasting and stronger depreciation trend versus the USD, which also reflects other factors such as falling commodity prices. Meanwhile, Vietnam decided to devalue the dong, for the third time this year. We have downgraded our Asia FX forecasts recently (also see our FX Watches published in recent weeks).
90 85
Asian exports impacted by weak demand 13
14 China
15 India
South Korea
Indices, Jan-2006 = 100*
140
200
130
180
120
160
110
140
100
120
Source: Thomson Reuters Datastream
Adjustment CNY regime makes sense While we understand the market concerns regarding China, the adjusting of the de facto CNY peg with the USD makes economic sense, in our view. The authorities wanted to show commitment to incorporate more market elements into the CNY regime, in the run-up to the IMF’s decision on SDR inclusion (which has been delayed to 2016). What is more, pegging the currency to a strong USD was hurting China’s external competitiveness. Some currency depreciation will not only help to restore competitiveness somewhat, but can also help pushing Chinese inflation a bit higher.
90 10
11 12 Exports Asia (lhs) Imports China (rhs)
13
100 14 15 Imports adv. economies
Source: Thomson Reuters Datastream *China: Import volumes are estimates, 12 months rolling.