China and Japan Playing An Increasing Role as Regional Economic Patrons

Date: 2015-10-22

China’s ‘One Belt One Road’ policy aims to expand infrastructure overseas. Japan too recently announced US$110bn of regional spending. Projected programmes from China/Japan are ‘only’ US250bn but this still amounts to 15% of combined Malaysian, Thai, Indonesian and Philippine GDP. Competition between Japanese and Chinese infra consortia is heating up especially in rail investment. In other areas too, we see evidence of Chinese/Japanese capital flowing into the region, be it lending or FDI or implicit government support. We expect this to grow, especially as Chinese banks’ regional lending picks-up. We believe China and Japan look likely to play a greater role as regional economic patrons in the next few years.

ASEAN the major long-term beneficiary of patronomics
While short-term, the Fed is likely to be the key influence on ASEAN markets, longer term these economies sit comfortably in the middle of patronomics and are where we see the most positive potential implications.

Discount rates might benefit from the flow of patro-dollars…
Low cost lending for infrastructure alongside greater involvement from Japanese and Chinese banks might provide lower cost funding than would otherwise be the case as US rates start to rise. And our assumptions on risk premiums may be too high if previous concerns about liquidity in current account deficit countries are off the table with implicit liquidity support (as in Indonesia in 2013) from China/Japan. Higher potential FDI/capital flows from these countries could allow the running of larger current account deficits than would otherwise be possible with rising US rates. To some extent, we believe the flow of ‘patro-dollars’ might offset some of Debtopia’s headwinds over time.

…while potentially supporting growth
ASEAN is currently stuck in a lacklustre economic environment sitting as it is at the top of a credit cycle, and for the commodity producers, facing structurally lower growth support from commodities. The ASEAN Economic Community is due to be established by the end of 2015. Through increasing connectivity in the region, the aim is to boost trade and investment, and in turn prosperity. However, to make a reality of this vision, the ADB had previously estimated it would require investment in hard infrastructure of approximately US$800bn, or 30% of ASEAN’s current GDP. Assuming ASEAN leaders had the ability to implement the grand vision, the questions remained how to finance this. This is why we think the patronomic theme is so timely. As Alice’s note suggests, the Bangkok-Kunming rail project alone could ultimately be worth 3.7ppts of Thailand’s current level of GDP

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