While China’s economy deteriorates, the rest of Asia remains resilient

After two years of pandemic, the expectation was that 2022 would be recovery year for Asia but many challenges have been in place for a few reasons.

The first reason is China continuing with zero-Covid policies, dragging down consumption and investment sentiment. The economy was recovering after the government eased restrictions in Q2, but the momentum of improvement has been only gradual. On top of this, the cooldown of China’s real estate sector, which started last summer, has continued, which pushed the government to adopt more relief measures to support the developers and avoid hard landing. The possible easing of the zero-Covid may bring further relief to the investor’s confidence, but the real estate market slowdown is likely to become a structural trend in the long term because of the decelerating economy and the population decline.?

That said, international trade remains a spotlight for the Chinese economy. China continued to be an important export hub for the global economy, with its trade surplus successively climbing up over the past few months despite the economic slowdown.

In addition, the geopolitical uncertainties have been on the rise over the past few months. Against the backdrop, we lower our projection for growth to 3% from 3.5% for 2022. For 2023, the biggest uncertainty is the lifting of zero-Covid policies, without which China might still grow sluggishly.

Beyond China’s underwhelming economic outlook, a much more hawkish FED than originally expected is putting pressure on financial conditions in the Asian region, especially for those central banks which are not willing to follow. The best case in point is the Bank of Japan which has continued with its ultra-lax monetary policy, keeping yield curve control at close to zero long term rates and pushing the yen below 138.5 against the USD. The PBoC has cut rates but unlikely to go too far, as the interest rate differential with the US widens.

The impressive part of Asia’s economic story in 2022 is the rest of Asia. Against the three major shocks – a decelerating Chinese economy, a very aggressive FED, and an energy crisis - Asian countries are still doing rather well in general. Both sentiment and consumption remain rather strong in most Asian economies even if some central banks have reacted aggressively to a jump in inflation (such as the Bank of Korea and Reserve Bank of Australia and, more recently, the Reserve Bank of India). Growth-wise, India and Vietnam will be best performing economies in Asia in 2022, and likely to be the case in 2023. A big push for diversification and favorable structural tailwinds such as favorable demographics, supported by policy support to invest in infrastructure and geopolitical tailwind, is helping ASEAN, India, but also Australia, attract a larger share of the M&A deals into Asia.

The most worrisome part of Asia, though, lies in frontier markets. With Sri Lanka having undergone a sovereign default which still needs to find a restructuring solution and Pakistan in a dear financial situation, financial risks should not be underestimated and potential contagion.?

More generally, tighter global financial conditions, a synchronized global deceleration and increased geopolitical risk, expanding from Ukraine to Asia and, in particular Taiwan, do not bode well for Asia’s economic future for the rest of 2022 and beyond. Still, ASEAN, India and Australia are clearly more resilient.

All in all, 2022 has proven to be a challenging year for China - both in terms of growth and geopolitically - but a rather resilient year for the rest of Asia, notwithstanding the pressure coming from an aggressive FED, weakening China and geopolitics. The risks are mountain for the rest of the year but a good chunk of Asia has shown its relative strength so far.

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