Asia can swing with the Fed, but shouldn’t mess with China
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
It seems that Yellen’s easy Senate confirmation hearing and China’s reforms were the main drivers of large capital inflows into Asian equity markets.
Asian stock prices marked a broad-based increase last week – after three weeks of consecutive declines – on news that Janet Yellen (the future chair of the US Federal Reserve) pledged to maintain the current monetary stimulus, and on some details emerging from the meeting of China’s key policy-making committee.
The question is: were these events just a trigger for a trading burst based on Asian market fundamentals, or did investors take them as meaningful investment strategy signals?
Read more: Markets soothed by Yellen, watching data
There is probably some combination of both, but it does seem that Yellen’s easy Senate confirmation hearing and China’s reforms were the main drivers of large capital inflows into Asian equity markets.
I shall, therefore, take a closer look at Fed and China events to assess their significance for portfolio investments in the coming months and beyond.
Doing the same thing and expecting different result
The first question I would ask is this: what did Janet Yellen say to sustain positive trading bets on Asia? The answer is: nothing new and unexpected; she simply repeated that printing presses would continue to run overtime “for the foreseeable future.” Markets, of course, should have known that without undue analytic strain.
And did she provide any new, or unexpected, rationale for pledging to continue the policy which – after more than three years of recovery – still has the economy growing at only about half its non-inflationary growth potential? Again, the answer is “no.”
Was she challenged to explain why the monetary policy was not delivering what one would normally expect from an unprecedented credit easing in US history? No, she was not, even though the policy she is espousing looks like “doing the same thing over and over again and expecting different results” — an intellectually unflattering quip attributed to Albert Einstein.
Read more: Taper,no taper—where does Yellen draw the line?
Following Einstein’s wisecrack, was it necessary to keep printing money to expand the Fed’s monetary base to a mind-boggling USD 3.7 trillion (a data point published by the Fed on November 13, 2013) and banks’ excess reserves (i.e., loanable funds) to USD 2.4 trillion when monthly averages of their consumer lending over the last two-and-a-half years were stuck in a very narrow range?
Indeed, the slowdown of banks’ loans to households to an annual increase of 3 percent in the third quarter of this year is not the kind of consumer finance needed to lift 70 percent of the US economy to levels that would avoid the current waste of its human and capital resources. And, as I noted in an earlier column, this is not the question of weak loan demand; non-bank lending to consumers is currently soaring at an annual rate of more than 8 percent.
Jamming with the Fed
Was it too impolite, or impolitic, for US senators to ask Ms. Yellen why all this was happening, and why she thought that continuing the same policy would yield a different result?
Well, if they did not ask, it does not mean that you – investors – should not ask.
And neither should you fall for the bromide that the Fed knows how to withdraw this huge wall of money in an ‘orderly’ way. Markets apparently have a different idea about that.
Remember what happened last September when it looked like the Fed might begin to cut back on its USD 85 billion of monthly asset purchases? Asian markets took a beating, Asian leaders got screaming that the US should be more mindful of the impact of its monetary policies on the rest of the world, and, according to some estimates, more than USD 300 million of emerging market bonds were dumped in a few days before the Fed said that it won’t be reducing its monthly asset purchases (also known as “tapering”).
Read more: Critics to Yellen: Show some QE regret
But whenever the Fed begins to “taper” – which, according to some Fed governors, could happen as early as next month – expect what the former US Secretary of State Hillary Clinton called America’s “jazz-like diplomacy.” In other words, following that wonderful and quintessential American musical genre, expect a long period of Fed’s policy improvisation.
Asia, therefore, should get ready to swing and jam with the Fed. No amount of screaming and finger pointing will do. And the best way for Asia to swing will be to get its economies in good shape. That means – just as the line from a famous jazz song says “take it while you can” – that Asia should take advantage of cheap money and favorable exchange rates it now has to (a) cut budget deficits and public debt, (b) narrow trade gaps and (c) hold inflation down.
And don’t mess with China
China is doing a bit of that; it is tightening its economic management to take all this in stride.
Asian analysts are wasting time trying to find out exactly what, when and how Beijing will do what its key policy making committee (the Third Plenary Session of the 18th Communist Party of China Central Committee) set out in its road map. They, and other China-watchers, should realize that everything is covered in the document (published last Tuesday evening, November 12, 2013) on the country’s sweeping reform process covering the economy, financial markets, judicial system, national security, party’s role and social policies. There is no improvisation here.
Some less contentious and simpler issues will be solved rapidly – as was the case with changes to the one-child policy and the abolition of labor camps. More challenging technical and political problems will be tackled with the tried and tested Chinese pragmatism — “crossing the river by feeling the stones.” There probably will be a whiff of improvisation here, but the party will control and make sure that all remains within the confines of “socialism with Chinese characteristics.”
Read more: Economics behind China relaxing its one-child policy
China’s Asian neighbors should not allow territorial issues to degenerate into confrontation and what, rightly or wrongly, Beijing perceives as hostile policies to obstruct its economic and political standing in the region. That would be damaging to Asia’s huge potential of economic development.
Remember, it took 40 years of tough negotiations for China and Russia to settle their border issues. India and China are now into their 50th year of technical and political dialogue about contested frontier regions.
And here is some anecdotal evidence about the economic dividend of friendly and peaceful Asian relations. On a private visit to a major Asian capital a year ago, I saw many gleaming condominium towers with billboards advertising easy sales – “nothing down,” “0 percent interest rates,” “special bonuses available,” etc. Aha, I said, that looks like what I saw in parts of Florida in 2007 and 2008. But when I recently returned to that city, billboards were gone and replaced by the eyesore of drying linen on elegant balconies in the city center.
What happened? A local acquaintance told me that most of those empty residential towers were sold out to mainland Chinese.
Read more: China’s early-bird investors are left holding the worm
I understood things a bit better when in my fully booked five-star hotel there were only a few sun-starved north Europeans, formerly the main customers in Asian tropics. Again, most of the rooms were rented out to the Chinese trying to escape their debilitating air and water pollution.
The next day, I boarded a completely sold jumbo jet flight originating in Shanghai en route to a popular Indian Ocean tourist destination. Visitor arrivals from China have reportedly doubled in the first nine months of this year in some Asian holiday spots.
Clearly, China is driving an incredibly fast-changing economic scene in Asia. With more than 300 million of an increasingly prosperous and well educated middle class (roughly half of all urban dwellers), that is hardly surprising. These are the people that will carry the Asian economy. These are also the people that are forcing China’s leadership to get in step with the times by paying greater attention to social justice, income equality and better public services – all part of the program of ongoing structural reforms.
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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow
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