Will 2017 be the year China’s President Xi Jinping finally tolerates sub-6 percent growth? Few questions matter more to North Asia’s year than machinations within the region’s biggest — and most fragile — economy.
The B-word came up often in 2016, as U.S. President-elect Donald Trump set his sights on what his team views as predatory trade and finance policies. The F-word, though, will get far more scrutiny in 2017 as bond-market and credit dynamics flash warning signals at a moment of global economic weakness. Nothing dramatized China’s fragilities more than a year-end surge in debt yields as the yuan’s drop and hints of inflation spook investors.
Japan and South Korea also face thorny challenges in the next 12 months. Here’s a look at what’s ahead for the region.
China: Earlier this month, officials let it be known that Xi isn’t wedded to the nation’s 6.5 percent target amid global uncertainties and concerns about surging debt. I’m trying to believe them, seeing as how similar signals emanated from Beijing in late 2015.
For all Xi’s pledges of epochal reform since 2012, state-owned enterprises remain dominant, export and smokestack industries are thriving, credit expansion and asset bubbles are rampant and censorship is expanding. While Chinese smartphone makers Huawei and Xiaomi are building market share and e-commerce giants Alibaba and Tencent are turning heads, China’s evolution from sweatshops to services has been dangerously glacial.
The problem is a lack of political will and global pressures. Every time gross domestic product disappoints, global markets plunge. Each time, Xi’s team responds with new bursts of stimulus. While it calms investor nerves in the short run, this pattern adds to Beijing’s imbalances — and the scale of its financial reckoning — in the longer run. Trump’s threatened trade war, including 45 percent tariffs, may significantly reduce Xi’s courage to restructure the economy, increasing odds of a Chinese crash.
Japan: Asia’s No. 2 economy ended 2016 on a bit of roll, as the yen’s 17 percent drop since Trump’s win buoyed exports and business confidence. Prime Minister Shinzo Abe also has a spring in his global step amid rave reviews for his landmark visit to Pearl Harbor in Hawaii. But he carries the same baggage that slammed his approval ratings for much of this year into 2017: a flagging, deflationary economy.
For all the Bank of Japan’s historic easing in recent years, wages remain largely flat and, outside of rising energy costs, inflation pressures are no more apparent than in 2012, when Abenomics got underway. Four years on, the program has addressed some low-hanging-fruit upgrades — modest tweaks to corporate governance, female labor participation and fiscal policy — but none of the shock therapy Abe promised.
As China slows, the Federal Reserve tightens and global trade stagnates, Abe will be hard pressed to sustain even modest growth. An added headwind: Bank of Japan Gov. Haruhiko Kuroda makes it clear monetary policy has gone as far as it can in reviving growth. In fact, Kuroda is under pressure to taper bond purchases to restore life to the secondary market. The only answer is for Abe to get serious about loosening labor markets, catalyzing a startup boom, lowering trade barriers and empowering women. To do so, he’ll need to display a level of courage and political will he hasn’t thus far. If not, the Nikkei 225’s late 2016 rally will turn into a 2017 rout.
South Korea: Among Asian leaders, Park Geun-hye arguably had the worst 2016, a year culminating in her impeachment amid an influence peddling scandal (she’s expected to step down by April). It was a stunning turn of events for a descendant of political royalty; her father was Park Chung-hee, who led South Korea’s economic development in the 1960s and 1970s.
Park’s downfall leaves a vacuum at the very worst moment for Asia’s No. 4 economy. In the best of times, South Korea is uncomfortably wedged between high-tech Japan and low-cost China, and looking for a niche. Park was elected in 2012 on a new-economy platform. She pledged to rein in the family-run giants towering over the nation’s 50 million people, unleash a startup boom and build a more “creative” society.
Sadly, she was undone by an uncreative plot allegedly to shake down those corporate giants for tens of millions of dollars through an emissary. Regardless of who inhabits the presidential Blue House next — outgoing U.N. Secretary-General Ban Ki-moon, perhaps — the Park years were pivotal ones that South Koreans will never get back. That drift and indecision left South Korea’s reformist drive in first gear, while China, India, Indonesia and the Philippines busily made inroads. It also created a fresh opening for North Korea to test Seoul’s resolve. Can South Korea find its mojo again? If it doesn’t do just that in 2017, its odds of competing globally will dim regardless of what Trump does and how fast China grows.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com
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