Radical policies to reshape a quarter of the world’s GDP
Radical. That’s probably the adjective that best covers the disparate economic policies being pursued in Asia’s three largest economies.
In Japan the government of Shinzo Abe is embarked on the 2.0 iteration of his programme to break out of the country’s deflationary slump. In China, President Xi Jinping’s government is in the midst of a supertankerlike turn toward domestic consumption. In India, it is Modinomics.
Together these three countries are home to 40 per cent of the planet’s people and churn out 24 per cent of the world’s gross domestic product (GDP).
Here’s a roundup of how things are shaping up in these economies.
India
Close to 27 per cent of the 1.28 billion people who inhabit the world’s fastest-growing major economy are under age 15. Many of that 350 million-strong cohort will be joining the country’s workforce in the next decade. That’s surely not lost on Prime Minister Narendra Modi as he hammers away at the inefficiencies that plague the Indian economy.
Since taking power in 2014, Modi has pursued a set of policies that aims not only to revive the economy, but also to make it resilient to external shocks and increasingly competitive with the developed world.
Reforms under Modi started off incrementally. In 2014 and 2015 he massaged an economy that was showing signs of grinding to a halt. A first priority was to attract foreign investors to set up manufacturing hubs. Modi made almost 40 trips overseas during his first two years as prime minister.
The result: foreign direct investment (FDI) commitments of more than US$75b ($104.2b) in 2014 and 2015.
Last year an additional US$33b of FDI flowed in. Modi took a slew of steps to ease entry barriers. Modi’s other focus has been to better manage government finances and plug leaks in the system that derail efforts to get benefits to the poorest Indians, 22 per cent of the population.
To wring corruption out of the system, the government linked the unique biometric-based ID issued to Indians — Aadhaar — with individual bank accounts and mobile phones. It uses this channel to transfer benefits directly.
Recent reforms have been even bolder.
The results of Modinomics have been mixed. Economic growth picked up to 7.3 per cent in the third quarter of 2016, up from 5.8 per cent in the first quarter of 2014. Inflation cooled to 3.4 per cent, a drop that was aided in part by softer prices of many commodities that India imports.
China
In the past two years the most populous country on earth has trans- formed from being the world’s factory to a maturing economy. President Xi’s government has focused on steadying China, especially on controlling excessive leverage and the spillover onto foreign exchange, rates, and stocks.
Economic growth, which ran at a rate of more than 10 per cent as recently as 2011, has levelled off. In 2016, GDP increased 6.7 per cent. China’s 13th five-year plan, which covers 2016-20, projected a base GDP growth rate of 6.5 per cent.
Investment, once a key driver of China’s growth, is dropping. Net monthly FDI, which declined after peaking in 2007, turned largely negative in 2016 as an outflow of funds weakened the currency.
The yuan depreciated against the US dollar by 6.5 per cent last year. For most of 2016, the spread between onshore and offshore yuan pricing was remarkably stable and narrow.
Interest rate policies, meanwhile, have been cautious.
While some observers expected China to aggressively lower rates to kick-start the economy, the country’s seven-day repo fixing ended the year higher: at 3.24 per cent.
The reason for applying the brakes: China wants to rein in leverage and asset inflation.
China’s agenda this year is tough: It must balance slower growth, interest rates, FX, global fund flows, and its pace of opening up markets. That’s before adding in the wild cards that are out there.
Japan
Prime Minister Abe unveiled Abenomics 2.0 in September 2015. This iteration of his four-year-old reform agenda aims to break the vicious deflationary cycle that has afflicted the economy for two decades.
To do that, it seeks to foster confidence and a sense of security, putting the country back on track to nominal GDP of 600 trillion yen ($7.36t) by 2020. That would require growth of 3 per cent a year. In the third quarter, Japan’s economy grew at an annualised pace of 1.3 per cent.
Despite unprecedented stimulus from the Bank of Japan aimed at supporting consumer confidence, the country isn’t exactly looking up.
In manufacturing the diffusion index shows a slow recovery in the sector, particularly among the small and medium-size enterprises.
Besides boosting short-term economic activity, Abenomics seeks to finance long-term goals such as fixing pension systems and improving social security. Part of that involves raising taxes to trim Japan’s mountain of debt.
The biggest risk for the government and the central bank is yen appreciation. The “Trump shock” weakened the yen by almost 10 per cent in November and December.
That pushed Japan’s stock indexes into positive territory for the year and helped Abenomics.
Abe may need more such luck.