China’s economic policy focus on domestic and, by extension regional, growth argues for a bullish view on Asian emerging markets in the face of the far-reaching effects of the COVID-19 pandemic.
Efforts to drive domestic demand growth, substitute imports and achieve technological self-sufficiency should inform investment decisions and opportunities in China in coming years. This has implications for other economies in the region. We believe they, and companies catering to Chinese demand, should be favoured by investors in the post-pandemic world.
China sees itself driving Asian growth
The pandemic has hurt Asia’s external-oriented economies badly. However, China’s ‘dual circulation’ policy can act as a backstop for regional growth, lessening the impact of the COVID shock and rising protectionism.
China sees itself moving into a new paradigm where the global system would be divided into three main regions: Asia, North America and Europe, with each region being led by a super-regional power.
This will likely lead to the rise of regionalism with strong intra-regional economic linkages against a background of de-globalisation. More crucially, China sees itself at the centre of Asia, engaging regional and global capital, financial and technological markets to enhance domestic and regional growth.
Regionalism versus de-globalisation
The effects of China’s strategy for Asia are already reflected in its growing trade relationship with ASEAN. The bloc surpassed North America in late 2019 as China’s second largest trading partner after Europe (see exhibit 1).
This boom not only underscores the huge potential of economic linkage between the two sides, but also reflects how their cooperation continued through the pandemic despite shrinking global demand and spreading protectionism.
The recently concluded Regional Comprehensive Economic Partnership (RCEP), which is led by China, looks set to be a common platform for regional cooperation, though it may not be a game changer in the short term.
At a regional level, China seeks to cooperate with ASEAN in the digital economy. It also aims to promote its ‘Health Silk Road’ initiative by establishing a China-ASEAN public-health cooperation mechanism to fight COVID-19. Beijing is also encouraging Chinese companies to continue to invest in ASEAN.
To address geopolitical concerns, especially in the South China Sea, Beijing is seeking regular dialogue with regional governments and trying to speed the negotiations on a code of conduct in the region and on maritime cooperation.
We believe the most important risk to emerging markets, including Asian emerging markets, is Beijing tightening policy prematurely. Disappointing growth as China pursues its deleveraging efforts too aggressively is a further risk, but not an imminent one.
In our view, the odds of such outcomes are low at this point given Beijing’s flexible approach to policy in order to balance growth and debt reduction.
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- Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This material does not constitute investment advice.
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