At the beginning of 2016, the financial world was obsessed with Asia – specifically the largest country (in the world) by population – China. Hedge funds were betting on the country’s collapse, and every single news release from the country seemed to spark market jitters and talk of a global economic recession.

Half a year later and things appear to have improved. The financial world is no longer waiting for China’s next economic news release with bated breath, and it seems that Chinese policymakers have, to some degree at least, exercised their control over the country’s enormous economy. Banks are slowly undergoing recapitalisations; capacity is being shut down in those industries which are oversupplied and the number of defaults and the rise, a signal that policymakers are no longer propping up failing industries. For now, worries about a “hard-landing” are gone.

Asia is improving but steady growth won't last long
Asia is improving but steady growth won’t last long

Asia is improving but steady growth won’t last long

China isn’t the only Asian nation with an improving economic outlook. During the past six months, Asian countries have undergone somewhat of an economic resurgence, helping to rebuild confidence in their economic outlook. India’s manufacturing PMI reading, for example, hit a 13 month high of 52.6 in August. Add to this passage of the GST bill and the rapid deceleration of food inflation thanks to a better monsoon, and the picture is altogether brighter than at the beginning of the year.

HSBC’s Asian economic research team points out that in ASEAN as well, there are nuggets of strength.

A cabinet reshuffle has provided hopes for accelerated reforms in Indonesia while economic data from the Philippines continues to impress. Vietnam is ploughing ahead thanks to wealth multiplier effect emanating from China and Singapore is showing remarkable resilience, all considered. Thailand has picked up a little steam, thanks to extra government spending and active tourism. And lastly, Korea delivered robust growth in the second quarter, due to better consumer spending and more local investment in property.

 

GS China Debt jumpUnfortunately, HSBC’s Asian team doesn’t believe the good times will last much longer. Much of the improvement in economic fundamentals over the past six months in emerging markets has been a result of the rush back of foreign capital into local markets. This has also allowed a number of central banks to cut rates, and others to forego hikes – stronger currencies have added extra polish.

Further, there has been an abnormally high demand for emerging market debt over the past few months, which is unlikely to continue if the Federal Reserve desires to hike interest rates later this year. HSBC notes that a degree of debt-saturation has set in across Asia, curbing future demand as households and companies become wary about expanding their balance sheets further. Does this mean there’s a lack of domestic appetite for Asian debt? What will happen when Western investors are no longer interested?

Another worrying sign is that Asian exports have remained flat throughout the summer and whatever improvement there has been made be attributed to the launch of new electronic gadgets. With our sustained rise in global CapEx, explore rates will likely remain low. As much of emerging Asia still depends on exports to propel growth it’s difficult to see how, without this rise in global capital spending, Asian economics can continue to improve. As the report notes at the end of its summary “underneath the surface plenty of structural challenges lurk, which still need to be tackled decisively. It should make for an interesting autumn.”