What might the Year of the Horse hold in store for China, Japan, India and Thailand? Read on.
China: happy trails
The lunar new year is beginning with… nothing. Murky forces have bailed out the Rmb3 billion ($490 million) Credit To Gold No 1 trust, which was exposed to a coal mine that’s gone bust. Whether the capital injection has originated from the trust company (China Credit Trust), the distributor (ICBC), the provincial government (Shanxi) or other figures in the coal-mining industry may not matter; what does is how this bailout was organised.
Inevitably there have been rumours that an arm of the central government corralled a rescue because Beijing didn’t want to allow China’s first shadow banking-related default occur in the days leading up to the holiday. That view deserves sympathy; it’s hard to imagine the US Treasury or Federal Reserve would have let Lehman Brothers collapse three days before Christmas.
Nonetheless the delay has deepened the issue of moral hazard, which is becoming acute as China’s credit binge gallops toward the cliff’s edge.
It also underlines the Communist Party’s preference for stability, even if that means delays to Xi Jinping’s reform agenda. What chance is there for liberalising interest rates, reforming the hukou [household registration] system, enabling municipal bond markets, weaning local governments off real-estate sales or other aspects of Beijing’s modernisation programme, if action is likely to trigger financial volatility?
The market was bracing for Credit to Gold’s demise; there was a sense that this situation could be contained and a good example set; the next default threat may not be so benign. This suggests Beijing will be open to alternative sources of lending: the coal miners still have operations that require funding. This could mean happy trails for private capital.
Japan: Abenomics’ one-trick pony
Abenomics may yet meet its short-term target of achieving 2% inflation by the end of this year. This is thanks to radical asset purchases by the Bank of Japan of ever-mounting levels of government debt. The weaker yen that resulted has boosted exports and Japanese stocks, but it has not yet led to the kind of wage rises needed to boost consumption.
The good news is that new machinery orders have been strong, reaching a five-year high in November and suggesting that companies are increasing capital expenditures. Bank lending to the private sector is also steadily rising from a 2005 low, according to BoJ statistics. This has yet to feed into wages, however.
The Ministry of Health, Labour and Welfare reported a modest uptick in average wages from October to November, to ¥310,000 ($3,042) per month, but the overall level remains below the ¥400,000-plus levels that workers enjoyed from 2002 through 2008.
A few months ago, Japan’s public debt passed the one quadrillion yen mark. While this is still almost entirely held domestically, the point of quantitative easing is to keep yields super-low, encouraging savings to flow to assets with better returns. Yet Abenomics requires ever increasing debt. It’s clear the Abe administration is concerned about a dangerous debt-to-GDP level; what else could possibly inspire its bizarre decision to introduce a consumption tax, effective this April?
The only way for Japan to remain in the saddle is sustained economic growth which generates more jobs for higher pay, and that requires the kind of reforms – to labour markets, to service industries, to health care – that Shinzo Abe has so far avoided. There has been progress on prising open the heavily protected agricultural sector, but the political plan seems to be to outsource responsibility (and the blame) for restructuring to the American-led Trans Pacific Partnership trade talks.
That is a risky bet; and trading partners, particularly the Europeans, are unlikely to be as accommodating towards another stab at yen depreciation. Meanwhile the prime minister seems to be spending his finite political capital on dubious projects such as visits to Yasukuni Shrine. Abenomics look increasingly like a one-trick pony, but probably one that will canter along for at least one more year.
India: BJP back in the saddle again
The wild horses of Indian politics are about cows. The Bhartiya Janata Party is hoping to win an outright majority in national parliamentary elections in May, which would allow its leader, Narendra Modi, to form the first government without a coalition partner in 30 years.
The prospect of the cow-loving Modi becoming prime minister is coming into focus. That may not be welcome for many of the country’s more cosmopolitan citizens; Modi’s electoral tactics have included accusing the Congress party and its allies of slaughtering cows for export in order to bankroll movements for modern women’s rights. And he has never really shaken off the massacre of thousands of Muslims in Ahmedabad early in Modi’s rule as Gujarat governor.
But Congress’ corruption, ineptitude and retreat from reform – reforms that would greatly benefit the poor, such as cutting out middlemen in retail – have cost it its mandate to rule. Congress scion Rahul Gandhi seems like a smart, well-meaning person absolutely unsuited to rule.
Modi’s record in Gujarat is good and he talks of reforming tax, boosting education such as backing vocational schools, supporting infrastructure and healthcare insurance. His programme remains fuzzy, but he has the backing of many industrialists and financiers; the Sensex has performed strongly since Modi was officially named the BJP prime ministerial candidate in September.
The risk to a BJP sweep hasn’t come from Congress, but the rise of regional and reform parties, particularly the Aam Aadmi Party (AAP), led by the dark horse candidate Arvind Kejriwal, who won the chief ministry of New Delhi in December’s by-election. Kejriwal’s modest posturing has captured the zeitgeist of the rising middle class, which mistrusts Congress’s anti-development policies and the BJP’s reactionary Hindu right wing.
But the party’s lack of experience has already led to missteps such as Kejriwal’s staging a protest march in the middle of the city, blocking traffic that virtually shut down the capital that he’s ostensibly running. Talk about horsing around!
AAP and its ilk score points by campaigning against corruption, a never-ending source of electoral fodder, but when it comes to actually governing, Kejriwal’s suggestions have been dumb ideas like subsidising water, forcing electricity tariff cuts, and other band-aides that won’t improve growth, productivity or employment. While third parties may yet trip up the BJP, Modi is increasingly looking like the winner of this rodeo, and that should put a business-friendly leader back in the saddle.
Thailand: Riders on the storm
An anti-Thaksin mob denying the majority its vote, serving as a Trojan Horse for unknown powers with possible royal and/or military connections. An ailing king. The growing likelihood of violence as the poor back the billionaire who helped improve their lot. Bangkok has been eerily calm, a phony peace.
We’ve been here before, say investors, but that view is dangerously blasé. It is true that the capital has been occasionally subjected to sieges and coups, and Thailand just bounced back. But the fiscal situation is deteriorating. It’s not terrible: the government’s debt-to-GDP ratio is rising but to 44.3%, a level far below many other countries. But household debt is also rising rapidly, as is bank exposure to risky personal and auto loans. The finance ministry has already slashed its GDP growth forecast twice in January, to now around 3%. The political turmoil has put equity and M&A activity on hold. Foreign businesspeople and tourists are shunning the country.
The biggest question is whether the political situation settles quickly, perhaps with a coup, as it has in the past. But that is a dubious assumption. The manoeuvring in the streets today has been building since a royalist-backed military coup ousted Thaksin in 2006. The clash between those who prefer to rule via patronage and assumed deference, versus those who wish for a society based on equality – all caught up in intensely personal, cynical power plays – looks to be more serious and has the potential to be more entrenched and more violent. Many businesses will suffer, and the government could be forced into capital controls or other stabilising measures.