Year of confusion looms

We’re heading towards a great year for making money. That’s a widespread forecast for the Chinese Year of the Pig.

Kudelka’s week. Illustration: Jon Kudelka

For what it’s worth, according to the soothsayers, we’re heading towards a great year for making money.

This is a widespread forecast for the Chinese Year of the Pig — more precisely, an “earth pig” — that starts on February 5.

Those more earthly than horoscopically minded, however, may prefer to examine the fundamental political and economic prospects for 2019 before they phone their brokers’ beach houses to double up on investments.

And these tidings aren’t trending towards comfort or joy.

These are some of the events that will shape 2019:

The world’s two largest economies, at political loggerheads, risk a worsening of their trade war, necessarily dragging in everyone else who trades with them.

Two of the three biggest global democracies go to elections, during which economic priorities will lapse into abeyance or worse.

And Europe’s economic anaemia is set to deteriorate, as Britain — despite dithering over the details — remains on course to leave the European Union on March 29. Deep chasms divide France over President Emmanuel Macron’s reform program, and Germany’s Chancellor Angela Merkel enters two years of ebbing influence before she stands down in 2021.

The markets are likely to fluctuate queasily as they anticipate and then digest the news from one election, one political initiative or mishap to another.

China’s leading role in driving global growth was already under question as Beijing has swung between reining in credit and resuming stimulus.

The trade war with the US — the truce ends next month — has already cost jobs in the southern industrial powerhouses of Shanghai and the Pearl River delta, and threatens much worse, with $US200 billion ($285bn) in Chinese exports at stake.

China President Xi Jinping. Picture: AFP

US President Donald Trump trumpeted progress from his New Year phone chat with China’s President Xi Jinping. (Trump also proclaimed victory after his summit with North Korean leader Kim Jong-un in Singapore, but it soon appeared: he hadn’t truly understood that Kim meant by “denuclearisation” a mutual process, in which the US also denuclearised.) On the China issue, Trump has found common ground almost across the board in the US, where Democrats and Republicans have felt duped — having fooled themselves for decades into believing that economic modernisation would lead inexorably to liberal democratisation. Xi may make a concession or two to forestall further economic headaches, but this would be a bitter pill — and he’s hardly taken a backward step since he took power in 2012.

Wang Jisi, dean of international studies at Peking University, wrote recently that “just as China has steadily integrated into the international community economically and socially, the clash of our value systems has become more acute than ever”.

On October 1, China’s ruling communist party will celebrate the 70th anniversary of the establishment of its People’s Republic — outlasting its counterpart in Russia, whose Union of Soviet Socialist Republics (USSR) imploded after 69 years — making significant concessions to Washington even less likely.

Gavekal’s Dan Wang says that “China’s digital sector is thriving, with formidable smartphone producers, world-leading internet companies and a strong position in the development of artificial intelligence”, so that China looks set to achieve at least some of the goals of the government’s Made In China 2025 plan.

Yet technological successes, he says, have largely come in areas where state guidance has had a relatively light touch, allowing Chinese companies to take advantage of changing technological and market trends. Thus “the biggest risk to the goals of Made In China 2025 is not that the US pressures the government into scaling back the plan, but that the companies driving progress” — including Huawei — “are knocked off their rising trajectory”.

Many companies, anxious about the trade war, are now pursuing a “China plus one” strategy, in which China production remains largely in place, while new investment goes into countries with lower labour costs. Wang points out that these “plus one” countries are mostly in Asia: India, Indonesia, Vietnam — which seems best placed — Bangladesh and Malaysia, along with Mexico.

But large firms, particularly in the tech sector, “want to avoid the gruelling task of rebuilding supply chains in other countries”.

Importantly for Australia, his Gavekal colleague Rosealea Yao believes that “the recent pessimism in the steel market is overdone”, with China’s low level of housing inventories indicating that construction activity — and therefore steel demand — can keep growing.

Looking beyond China, as the new year opens, the list of potential political and thus, naturally, economic turning points in our region and the wider world keeps growing longer.

Thailand goes to the polls on February 24. The Philippines elects a new House of Representatives and half its Senate on May 13.

In both cases, Southeast Asian autocrats are likely to be affirmed, in the former, the former general who led the 2014 coup, Prayuth Chan-ocha, while the latter will test the popularity of President Rodrigo Duterte.

Indonesia votes on April 17, with President Joko Widodo favoured to return but with dangerous opponent Prabowo Subianto, another former military man with autocratic inclinations, hot on his heels.

India must hold an election by mid-May, with the BJP party of Prime Minister Narendra Modi — a great hope of reformers when first elected — likely to lose ground to a resurgent social democratic Congress party under Rahul Gandhi.

The European Union elects a new parliament on May 23-26 that will prove more troublesome for the bureaucratic barons of Brussels than previous assemblies.

In the Pacific, five of Taiwan’s six diplomatic allies face elections — Solomon Islands in February, Tuvalu in March, Nauru in July, Marshall Islands in November, and Kiribati in December — setting up an interesting test as to the eagerness of Beijing to build its support base in the region. The Federated States of Micronesia also votes, in March.

North Korea will also hold elections this year, for the Supreme People’s Assembly. Last time around, there was a commendable turnout of 99.97 per cent of eligible voters, who backed the ruling Democratic Front for the Reunification of the Fatherland by a remarkable 100 per cent — but with a zero swing. The previous election also backed the Democratic Front unanimously.

On April 30, Japan’s Emperor Akihito, aged 85, will stand aside in favour of his son Naruhito, the first abdication in two centuries — adding to the uncertainties in a country whose exceptionally durable political leader, Shinzo Abe, has vowed to raise the GST from 8 to 10 per cent in October, and wishes to change the constitution to “normalise” Japan’s military status. Construction for the Olympics in 2020 should help boost the economy in Tokyo at least, handily for Abe, with elections due for the Upper House in July.

Richard Martin, managing director of Singapore-based business analysts IMA Asia, is a calm and usually unusually accurate forecaster. He believes that “despite ripples of fear in global financial markets, most indicators continue to point to a moderate downturn in 2019 rather than the onset of a recession”.

He nevertheless expects Asia’s export growth this year to halve from the 10 per cent pace set in 2017 and 2018, with the end of both quantitative easing and a brief synchronised upturn in global ­demand.

Reviewing the region, Martin says: “Unexpectedly, Japan leads the pack in north Asia with strong local demand in 2019. Consumers are pumped up by the tightest labour market in 40 years while businesses are using record profits to lift local investment. Local demand will remain strong in the Philippines and Vietnam.”

He finds that “Indonesia is finishing 2018 with a surprising spurt in local demand that could broaden in 2019. Thailand is also doing better. China ended 2018 struggling to reverse a slide in local demand. We expect a lift in stimulus to halt the slide, but 2019 is looking like a subdued year. South Korea and Taiwan are suffering from a slowdown in the global semiconductor cycle.”

Despite the US-China imbroglio, the trade walls are not going up everywhere. The comprehensive new 11-nation Trans Pacific Partnership that includes Australia but not the US came into effect on Tuesday. And a Japan-EU trade deal is set to launch on February 1. But the Regional Comprehensive Economic Partnership seems stuck, with India especially reluctant to concede any ground on agriculture.

A reformist China might once have gone for broke and joined Vietnam in the TPP, outflanking Washington, but not now.

The ultimate investment winners in 2019, as ever, will be those who pay attention to what’s happening on the ground.