Signs of optimism in Asia

The stars are aligning in Australia’s key export markets of China, Japan and South Korea.

The Chinese economic rollercoaster may be headed for another climb, with growth stabilising at a decent rate.

The new economic year has opened on a rare note of optimism.

If it’s possible to set aside the bitcoin baloney, and the capacity of Donald Trump to surprise and shock, the conditions that count for Australia hold the prospect of continued steady growth.

Of course, Canberra retains a magnificent capacity to trip over its own bootlaces, both cause and effect of the rapid turnover of prime ministers in the past decade.

But insofar as our oppor­tunities for prosperity lie in the region to our north, the signs are promising.

The prospect of war triggered by or in North Korea hung like a cloud over East Asia throughout 2017. But while Tuesday’s talks between North and South Korea are only a start to defusing the tensions, they are that.

Moody’s, looking at the long shadow cast by the Korean crisis in a review last week, had warned that not only South Korea but also Japan, Hong Kong, Vietnam and Singapore would be swiftly hit economically by any conflict.

And globally, the ratings agency said, “the impact on electronics and related sectors would be ­material, where companies rely largely on Korean-produced components such as memory chips and liquid crystal displays and cannot source adequate replacements quickly”.

South Korea, despite this threat, enjoyed a surging economy in 2017, in part thanks to the — to some, surprisingly adroit — management of the new centre-left government led by President Moon Jae-in. He has only just started his five-year term.

South Korea is Australia’s third-biggest export market. Our second, Japan, is also going through a ­period of stable political leadership, with Prime Minister Shinzo Abe recently re-elected. He will be nominating the central bank governor when Haruhiko Kuroda’s five-year term expires in March, with most observers expecting Kuroda to continue.

This would largely be welcomed by the private sector. He has suppressed the yen, and presided over a great stockmarket surge, with the Nikkei hitting a 21-year high in October.

The prospects for our top export market, China, are also positive for its Dog Year ahead.

Xinhua news agency said that following the annual central economic work conference of the ruling Communist Party chaired by President Xi Jinping in Beijing shortly before Christmas, China would “fight the critical battle of addressing major risks with the priority on managing and preventing financial risk” over the next three years.

That crucial meeting decided that China would maintain its “proactive fiscal and prudent monetary policy” for 2018.

That’s good news for those concerned about the capacity of China’s debt overhang — heading towards 320 per cent of GDP by 2022 — to trigger a correction.

By coincidence, China like Japan must appoint a central bank governor for a new five-year term, also in March — when many new key personnel appointments will be announced at the annual ­session of the National People’s Congress.

But unlike Kuroda in Japan, Zhou Xiaochuan, the widely respected incumbent in China, will not be available for a further term, having already served a record 15 years.

He has the gravitas even to challenge — or educate — the all-powerful leader Xi over key economic policies, a capacity no likely successor would share.

Yu Yongding, who served on the central bank’s monetary policy committee, is one of a very few other senior economists in China who retain a similar licence to make critical comments when required. He wrote last weekend that “though China’s financial system is fraught with worrying ­vulnerabilities, many Chinese economists believe the country has at last entered a period of stable annual growth of about 6.5 per cent — a level in line with potential”, as well as handily delivering the ruling Communist Party’s core aim of doubling the economy in the decade to 2020.

“I am less sanguine,” Yu now warns. “For decades, fixed-asset investment was the main driver of growth, accounting for almost half of total demand. Yet since late 2013, investment growth has been declining steadily, a trend that ­accelerated during the second half of 2017 (and in the third quarter turning negative).”

From the perspective of structural adjustment, he points out, the declining dependence in investment should be hailed as an achievement.

But household consumption is unlikely to pick up the slack, he says. And while China can use fiscal policy to shore up demand, this is limited by local governments’ debt burden and by the appropriate clampdown on those governments’ “financing vehicles”. Yu does not expect the government to allow the budget deficit to exceed 3 per cent of GDP.

If growth looks like sinking far below the 6.5 per cent target, the government has other macroeconomic stabilisation tools at its disposal, he says, which it would probably deploy “despite their future high costs”. More promisingly, he says its efforts to support innovation-driven growth and to introduce structural reforms “are likely to produce major returns in the long term”.

The Chinese rollercoaster may thus be headed for another climb, with growth stabilising at a decent rate. “But as with most popular attractions,” Yu adds, “its passengers may have to wait a while.”

That’s all something Australia can live with, especially as continuing Chinese demand seems set to push up the prices of our four biggest exports — iron ore, coking and thermal coal and LNG.

China’s strong push under Xi to transform or close its most polluting industrial plants, even if this involves a contraction of growth as expected for the steel industry, is not likely to constrain key Australian inputs since these mostly contain fewer impurities than their Chinese competitors.

Singapore-based business analysts IMA Asia says China’s strong 2017 performance “suggests two things about the outlook — Beijing is doing better at driving its economy, and the rapid lift in current growth shows Beijing has at least one effective tool for curbing debt risk”.

Even in a worst-case scenario of a trade war with the US, it is important to note that, as IMA points out, China exports only about 12 per cent of what it makes.

Asia, IMA concludes, “has been a major beneficiary of the 2017 recovery in global demand”. But the export sector can’t transform the region as it did in the last 50 years. “Growth in Asia’s next decade will have to come from domestic demand.”