Robert Horrocks, PhD, Chief Investment Officer, Matthews Asia
Over the past decade or so, Asia has been notable for the reformist governments that it put in place. Governments in Asia appear to me, on average, to be more inclined to push for productivity-enhancing improvements in the economy-capital market reform, an increased role for market prices, deregulation, democratisation and new legal structures.
China has been the standard bearer of much of this reform, and is being used as a model for the least wealthy countries, such as Myanmar, Vietnam and Cambodia, as they start on the road to wealth creation.
But what is going on? China seems to be backtracking and Asia is faltering. Is it all as bad as it seems? I would argue not. I think one has to separate the short-term political manoeuvring, which is heavily influenced by the economic cycle, from the longer-term trend. Asia is still the home of reform.
Fiscal frugality
Tighter monetary policy in the US and slowing domestic Asian economies are impacting corporate profitability and sentiment in Asia.
Governments naturally want to react to this by boosting domestic demand. We have seen interest rate cuts in Taiwan, Indonesia and New Zealand, while South Korea maintained its policy rate at a low 1.5%.
China has been cutting reserve requirement ratios. We have seen Thailand using tax cuts and infrastructure spending as a way to spur demand. Indonesia, too, seems to be doing a better job on infrastructure.
But there are disturbing signs for reformists. Despite the good reform-related headlines coming out of India (relative to China at least). Modi has been unsuccessful at reforming land acquisition laws that would help clear the legal obstacles in the way of implementing an infrastructure program (funding would still be an issue).
Elsewhere, despite some improved rhetoric around corporate governance and increasing dividend payments in South Korea and Japan, implementation across firms remains patchy.
In Thailand, the military government is trying to craft a new constitution that has been criticised for reducing basic freedoms and trying to create new emergency powers wielded by the executive.
Of course, the headlines tend to focus on China where the government appears to be backtracking on reform-tightening capital controls and slowing the pace of financial market reform.
But I think this is largely tactical. China has been trying to balance three aims-a freely tradeable currency, a stable exchange rate and an appropriate domestic monetary policy.
One size may not fit all
However, you cannot have all three. If your currency is freely tradeable and you increase (or decrease) the supply of your currency, the market will depreciate (or appreciate) your currency.
If you wish to fix the currency and allow it to be freely traded, then you have to adjust the money supply to balance the foreign exchange market-but that might not be optimal for your domestic economy.
And if you wish to have the right monetary policy and a stable exchange rate, well, you cannot let people trade the currency freely. And that is the decision the Chinese have made.
But I believe this is just a tactical response to the market's weak sentiment toward the Chinese currency and the Chinese government remains committed to making capital allocation more efficient across the economy, raising the role of the market, and making the financial system work better for its ordinary citizens. It just cannot push forward with all of the reforms right now.
Despite all of this, there are signs for optimism. In Indonesia, President Joko 'Jokowi' Widodo is looking to spend about US$400 billion from 2015 to 2020 on infrastructure.
Countries such as Vietnam and Myanmar continue to push for basic market reforms. And in Japan, despite the patchy corporate reforms, we have seen some aggressive policy initiatives from its central bank, which in many respects is taking the lead in unconventional monetary stimulus globally.
So Asia's reform process has not halted. It continues apace in many countries, in others it has tactically slowed. But it remains there in the background.
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The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC ('Matthews Asia') does not accept any liability for losses either direct or consequential caused by the use of this information.
