The United States appears poised to revisit its trading stance with China - and Asia more broadly - after the inauguration of President Donald Trump. Andrew Tilton, chief Asia economist of Goldman Sachs Research, considers the Asian economies most at-risk of disruption and the evolving roles of both China and the US in the region.
This podcast was recorded on February 6, 2017.
All price references and market forecasts correspond to the date of this recording.
This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.
Copyright 2017 Goldman Sachs. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Strangers Goldman Sachs, where we discuss developments currently shaping markets industries in the global economy, maneuvers Jake Seaward and I run corporate.
communications heard Goldman Sachs. The interconnect
Nick of global markets has been a hot topic in the political realm of last summer months. My yesterday entered Tilton is the chief Asia economist for Governments Ex research and is here today to discuss the economic relations
it's between asian economies, big and small, and also across the Pacific and around the world. Andrew welcome to the programme. Thank you.
so it's hard not to start off with your take on the rising tensions between the United States and Asia, one of present trumps first actions after assuming office
was to end: U S: involvement in the transpacific partnership or t paint,
Investors in our recent macro conference in Hong Kong, cited the risk of damaging trade wars
as their number one concern for twenty seventeen, and the presents already had a couple. Interesting phone call
with leaders in the region. What are the key risks?
opportunities for Asia. From this new climate, I think a lot of the historic success
of EAST asian economic development has been built on manufacturing exports
growing. The manufacturing base, Export Timor.
to the: U S and other developed markets- that's been predicated on a relatively free
open trading environment if that comes into play
sure, because some of the new actions of the administration, that would be a say
having it rested. A development strategy not only of China but of other nations in the region,
commentators expected any increase in the. U S puts on taxes or tariffs on
you'll be reciprocated would be hard to imagine China not responding
I'd be the winners and losers. In that kind of a scenario, I think both economies,
you'll see domestic industries that face foreign competition
benefiting they'll have higher domestic profit margins. If they dont have to face is much import, competition,
but in general, will be more losers than winners, and I think some of the biggest losers
will be in the small open economies that region and think in places like Korea and Taiwan, or the trade
air of GDP is quite large and why
many firms produce components that are exported to places like China, for assembly and for ultimate destinations in the developed markets. So even if,
Trade barriers are targeted at these economies. Tray berries target, for example, at China, could indirectly affect these
armies and because of their very high dependence on trade, they would suffer even if they're, not the focus of trade barriers.
word chinese producers prison they just pass through price increases to: U S, consumers, most
likely you have relatively low profit margins for chinese industry at the moment. Therefore, the degree
to which they can take lower margins and avoid a big price increase for Europe's consumers is pretty limited. There is, of course, the possibility that the chinese remedy depreciate further and
chinese producers, thereby regain some of their competitiveness from hire you
import tariffs, the weaker currency against the dollar,
the ASEAN countries, including the Philippines in Indonesia, depend a great deal on both China and the: U S for growth,
Where would they end up if the US and China reduced their cooperation with each other, and we saw rising trade tension that
our economies type
and being a noble example Malaysia's well. Singapore would be hurt in assent.
Manner to korean Taiwan. As I mentioned earlier, the large
economies, particularly Indonesia, but also Phillipines, have more
of a domestic demand story. They have young, rapidly growing populations and a bit more prospect for developing their domestic economy and a bit less reliance as a share of GDP.
on foreign demands, I think they're better position, but they won't escape some fall out from a significant trade conflict between the? U S in China
but a lot of talk over the years about China's debt problem or debt situation, some of them
I goals and how analysing viewed it in the capital outflows and the risks associated that have gone back and forth mostly
Sadly, these concerns appear to have receded. Where do you stand on China's twenty seventeen outlook and can
continue to meet their growth targets. Menteur
being a regional level of growth and high level, stability is really high priority for the chinese administration this year, ahead of the once every five years, leadership reshuffle late in the year, so policymakers have prioritized stability. They ve hinted that they might accepted
less growth if they can avoid a risk of much less growth or of a lot of financial volatility? So
the willingness to continue fiscal stimulus
seasonably, easy credit growth is apt to be fairly high. Policymakers are tied.
Being in target ways to address what they see as the biggest risk. Further your head, one is capital outflows which have been significant problem. You seen a tightening up in administrative controls on capital flows,
to a shadow banking. So you see some actions by pvc banking regulators attempting to address some of the rest there
and third main area of focus has been housing where we had a big run up in housing prices in the so called tier one and two cities: the bigger cities last year, which prompted policy makers to institute some demand controls in those cities and try to discourage banks from
turning to aggressively Anna Mortgage front and if those efforts being more or less effective. To date, I would say the efforts over the past eighteen to twenty four months to stimulate the economy had been pretty effective. So growth is back on an official GDP basis back in line with the target six point: seven percent was growth. Last year the target was six point: five, seven the efforts to tighten, I think her it's too early
now how effective they'll be, it does seem like there's been some slowing in housing area and again
have the data yet, but it appears as if some of the efforts to control capital Outflow Tickly, some of the new measures instituted Laden, two thousand sixteen have had at least some impact
so present tromp during the campaign made the cheapness of China's currency a regular part of his dump speech, but
It's been notable. Let China stance over the last couple years. Words. Efforts to prop up the Roman me as part
broader strategy, reducing some of the capital cap loveless. You discussed
and joining. I must benchmark currency basket. They ve syn,
accomplish the latter gold, you expect a change in the government's approach to the currency this year. We think they prefer to see lower capital outflows. That's priority number one, but wouldn't be averse to having a bit more depression
asian. So that concern is primarily about destabilizing capital flows that could cause financial instability in the domestic economy. If you have big deposit flight, that's not something they want to see and market attentively effect, domestic credit conditions, but we don't think they're averse to having mild sloped appreciation and that's really what we got on net in two thousand. Sixteen. We do believe they're reluctant to see a large one off depreciation. That is too quorum quote let the currency go, which is what some investors have expected, or even hope for it from a trading perspective that to the chinese authorities represents a lot of uncertainty. Uncertainty isn't something like again, particularly in this leadership transition year. So we expect
than to continue to try to manage the current tv, tight controls on capital flows and the willingness to use some foreign exchange reserves to moderate any depreciation that occurs. You talk about managing the currency and present tromp has a choice
far from that naming China currency manipulator. Not under this. U S law that the presence to address every year. How might the Chinese respond to that
currency, manipulator, designation by itself, doesn't require the: U S to institute tariffs. It only requires so called enhanced monitoring of China by the; U S, treasury. So from that perspective, from a genuine economic impact of such a statement will be pretty low, and so I would expect most likely that China would respond to words with words and probably not a huge amount of retaliatory action. Of course, at the. U S then later imposes tariffs that a different story, and I think China would retaliate
but I think policymakers there well versed on the: U S, actions in their potential consequences and probably won't overreact, something that ultimately will be more cosmetic than real. So
here? In the? U S: monetary policies, gradually tightening alot of people expect to behave.
This year the been two eggs in the last two years after really non from us a decade
colleagues and Goldman Sachs Research expect as many as three this year, which could lead to a stronger dollar. We ve seen some impact that what would the impact
of higher: U S rates in the asian economies, asian investors,
Policymakers really watch the FED keenly because said policy and the dollar have a huge impact on financial conditions in that part of the world through a number of different channels through the impact on: U S: growth on commodity prices, on capital flows to and from there,
and so FED policy is really critical and, as you said, we ve been through a very benign period of their
easy: U S. Monetary policy with only had a couple of rate hikes so far and now we're facing the prospect of a bit of an acceleration in the pace of great heights. Typically, those have been periods that have been not so pleasant from an emerging market perspective. In this case. In two thousand seventeen, we don't anticipate that most asian central banks will be raising rates. So in the past we tend to have a high degree of correlation between the direction of travel and U S rates and in Asian Central Bank's policy moves, but because inflation still pretty low in much of the region and growth is still underperforming, policymakers targets in a lot of places, we think policy is likely to remain pretty loose and that's why? Unbalance we think
the interest rate differential, at least in terms of short term interest rates between a U S in Asia, probably increases and probably on net, that's helpful for the time. So, as you discuss that divergence will be
implications of a broader story of divergence between the. U S. An asian markets in
recent years have seen increased dollar borrowing by asian corporates. This is a little
different than what happened prior to the asian financial crisis. At that time, you had a lot of financial institutions, borrowing short term indoors, which create a lot of vulnerability when their exchange rates began to fall, it made it much harder to repay those dollar loans in local currency terms. You have some of that dynamic today, but its lead
pernicious in the sense that it tends to be longer term dad and intensity non financial companies. So there is less a knock on effect to the rest of the economy in the rest of the.
And presently most of those companies have dollar exposure because their selling in dollars by large in some cases they don't because they just see dollars as a cheaper funding alternative. But I think in many cases they do have that so called natural hedge, so in this case,
I think it's as harmful
certainly less likely to lead to an acute crisis. Nonetheless, if we do
see further dollar appreciation. It does increase that local currency burden of repaying those loans and probably has some negative effect on investment and growth. The sucker by Japan
Second, Japan's been mired in pretty stagnant growth over several years now and last
your began some rather drastic policy efforts to reverse that trend by pursuing negative interest rate strategy has
as far as the Biagi been in this experiment, and you think this year,
we will see a better result from that effort, partly successful its avoided. Further deflation, we ve seen generally somewhat better inflation performance in the few years since dynamics began and since the
J began a more aggressive monetary using strategy, we enter
NATO that inflation will still remain below one percent over the course of two thousand seventeen, which is still some distance from the two percent inflation target. And now the Bank of Japan has interest rates essentially pegged for the first ten years of the interest rate.
at close to zero percent, so really monetary policy fields pretty tapped out at this point and any impetus to the economy is going to have to come through fiscal policy which, in Japan is politically quite difficult.
For the rest of the world, if the rest of the world does much better than Japan will be able to export or currency may be halted. Appreciate. Further, both of which would impart a stimulus to the economy. So in the absence of a big damage,
Steam was programme. Really Japan has become a kind of a play on the global reflation theme. If you ask
raise rate significantly. If global growth does better, Japan will do meaningfully better. If not, Japan will struggle
given their demographics, the limits of central bank policy, the
Sattler, the national governments can do. They have any room to manoeuvre. Really fiscal policy
He is still a lever where there is an opportunity, perhaps to try to stimulate even more. In the short term, the deficit is large and its unsustainable, but ultimately debt
sustainability is about the debt ratio to the ECB,
me, it's got a new marina denominator, focusing too,
lucidly and the numerator cutting the deficit are cutting dad might be detrimental to growth, which hurt the denominator. So it's really a balance between those things. If there's a prospect
for reflecting the economy further in the short run that could help inflation get back to say two percent on a sustained basis
That might actually be helpful in the longer term for Japan to get out of its low inflation trap so that something that I think policymakers have contemplated through. Also, a number of structural reforms,
then discussed, including things are even more politically sensitive, like immigration or changes to labour laws, but ultimately things aren't that
add right now to pay. It is a pretty nice place and so that political pressure to do some of those things is still not extreme enough. In our view, for those changes to occur,
Therefore, really what happens? The rest? The world is going to be a key determinant of the the japanese outlook. Over the coming year, that's turned in
Prime Minister Modi enacted a demanded innovation policy in November of last year, never to crack down on corruption and illicit activity.
There were some negative consequences: lower amounts of cash in the economy for time that end
upsetting the business community reduce confidence amongst consumers as
levels normalized. Should we see growth recover there? We should see growth but better. Over the next few months,
but before I go the details of that, I would just say that I think the democratization is really one most fascinating things that occurred in the last few years anywhere in the world. It something that I think economic graduate students will be studying five or ten years from now
economists got over use vehicle analogies, but I,
the analogy here- that's really tempting is
on, your car driving full speed in the freeway inside to do an oil change. That's basically what happened. It took almost ninety percent of currency out of circulation and tried to reinforce it
not normally something you think about, but its essential to the functioning of,
vehicle, or in this case the economy and what happened was a severe drop in consumption, because people simply didn't have the cash or in some cases they had cash, but only large.
Because there were enough, small bills are changed to go around, so we saw a big hit and consumption and economic activity late into doesn't sixteen.
Now the cash levels are getting back to normal. We do think will see it acceleration, particularly on consumption side. What we,
no yet is what the long term consequences are going to be the hope of a gun
and is it will discourage so called black money, and it will encourage the financial position of the communist courage. People to hold bank accounts and use electronic means of payment rather than cash. It may also increase the tax base, but it's also increased uncertainty allowed its caused a meaningful hit, a business over the last couple of months. So that may have some lingering effect on investment as well. The last uncertainty is how,
fact popular perception of Prime Minister Modi. He has been a very reform oriented leader he's facing some tests in a number of state elections over the coming months.
If he does well, then we can probably feel confident about the reform path. Continuing if there's a setback for his party, that might have negative consequences for the markets, was the country prepared psychologically for that,
because economies at the end of the day depend a great
on consumer confidence in and their readiness to spend and where they ready to move to more financial Azteca. Ultimately, the industry,
isn't there for India to be fully funny
sliced economy in the short term. There have been a lot of important efforts over the past few years in terms of provision of bank accounts, the rural population, a unique identification number that helps provide some of the infrastructure for bank accounts and fur financial inclusion. So some very important steps have been taken:
still by some accounts. Eighty nine percent of economic activity was taking place in cash. This is pretty difficult to replace with electronic activity in each short space of time.
political transition a key theme, not only in the? U S, but also in Europe and throughout Asia
What are you watching this year, though, help determine the longer term trajectory of asian economies. There are some
really important changes
senior leadership and in policy the one that's most in focus of courses in China. Where President she will be leading the process to reshuffled the senior leadership, the Standing Committee in particular and a lot of speculation about what form that might take and how it might impact that pace
erection of economic reform. In our view, the direction of economic reform has been reasonably clearly set out by the president, and we don't have a strong reason to think that would change the pace of economic reform might accelerate somewhat.
If he has a leadership, grew understanding can
in a politburo in the ministries that is aligned with his objectives? And there are political,
ages elsewhere in the region as well. A lot of uncertainty currently in Korea, for example, but the changes
is the one that's probably capture the most attention and, of course, come
back to the? U S! How the Trump administration decides to deal with the political and economic agenda in Asia will be very important.
Well, geopolitically alot of people expect the? U S to treat a little bit from the region they already done so by abandoning PPP. Does that give China
spend their ambitions in the region. Many people's backing that, in a political sense, but an economic sense, can we see more of
You ve already seen in the Asia Infrastructure Bank and the like, both for political and economic reasons. I think China will be making efforts to expand its role in the region on the trade front in the absence of tea bp. China's moves to further regional economic groupings like so called
the EPA trade deal for private advantaged by the lack of a competing deal and probably get a bit a momentum as a result of the tea bp ending and then politically
we will no doubt see efforts to reach out to a number of countries, particularly those that
may be less certain about the relationship with the. U S. I was in Australia. Last week, president trumps phone call with the austrian pm was on the front page of every newspaper,
part of almost every article was the note that China would certainly be looking to
The advantage of rights,
you travel lot and asian, and you speak with investors, policymakers really across the whole region. What is the difference about
how some of these issues we ve been discussing your view there from that region, verses from here in New York or in London. Well, thee:
points of a free and open trade environment to the prospects for these economies is very high? I think that's really taken for granted
by a lot of leaders throughout the region and now that it's perhaps in question how open acts
to you ass, an even other markets, will be in the coming years. It's of grave can
to a lot of leaders out there. It's the first question were asked by clients and policymakers, the region. What is the new administration
gonna do. Are we gonna see tariffs, so that's of great importance and then linked
that really in general, the stance of the U S on so many issues is of great importance to both the Economics
the policy environment in Asia, so those things
it may seem relatively small from a U S. Perspective, haven't outsize impact in Asia, and that extends broadly to these secure
role that the Eu S has played in Asia. Historically, since world war to the relatively rules based
trading and economic environment that we seen and also to
issues like: U S, economic and fed policy, the impact that has on capital flows to the region. Most countries have significant export exposure to the. U S. Most trade is invoice
dollars. So really what may seem like small nuances in? U S, policy have very significant effects on both investors and policymakers in Asia. So a lot of questions at the moment,
but will stay tuned and thanks for joining us? Thank you. That concludes this episode of exchanges of Goldman Sachs, I'm
Stewart. We hope you join us in next time. This spot gas was recorded on February. Sixth, two thousand. Seventy all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any represent
or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too that listener, nor to constitute such person a client of any Goldman Sachs Entity.
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