China Focuses on Reform
In the second quarter, the depth of China’s economic problems will become even clearer, with virtually every major indicator — barring, perhaps, those for services industries and household consumption — likely to show slowing or negative growth. Attention will especially focus on the housing sector slowdown’s effects on financial stability and employment in regions most directly exposed to construction-related industries, especially the rust and resource belts of northern and northeast China. Stratfor expects reports of defaults by local property developers, resource companies and building materials businesses to become more common this quarter, along with anecdotal evidence of localized economic and employment crises in provinces like Shanxi. However, thanks in part to proactive government measures to calm local financial crises and in part to China’s inherent internal economic fragmentation, these crises will remain fairly isolated within the quarter.
Economic fragmentation, in conjunction with the government’s desire to allow the economic slowdown to continue and to use the slowdown to drive economic reform and restructuring, make it highly unlikely that Beijing will reverse course and engage in large-scale economic stimulus this quarter. Further interest rate or reserve requirement ratio cuts are possible—even probable—but will serve primarily to ensure that banks have ample liquidity to manage rising non-performing loan ratios. Otherwise, Beijing likely will continue using targeted fiscal and financial measures to boost certain regions and industries— notably services, agriculture and manufacturing—rather than opt for investment and credit expansion on anything approaching the scale of the post-2008 period. In the meantime, Chinese authorities will continue the messy process of implementing long-discussed reforms such as establishing a national property registry, creating a deposit insurance scheme (as a step toward liberalizing deposit rates at state-owned banks), and expanding municipal bond pilot programs.
In the political sphere, China’s second quarter will be dominated by the ongoing anti-corruption campaign. Over the coming months, the campaign will focus on officials from the 26 state-owned enterprises publicly named as potential targets in February, with particular attention to businesses in the struggling resources and construction-related industries.
China will continue expanding investment, diplomatic and overland infrastructure ties across its periphery this quarter. Beijing will pay particular attention to implementing President Xi Jinping’s much-touted Silk Road Economic Belt initiative and solidifying plans to build overland rail ties to Thailand. In May, representatives from China and Association of Southeast Asian Nations member states will meet to discuss the implementation of the nonbinding Declaration of Conduct in the South China Sea, but Stratfor does not anticipate major advances or shifts in the status quo for either the South or East China seas.
‘Abenomics’ and security reforms come to the fore in Japan
With the current Diet session set to conclude in June, the coming months will see a flurry of legislative activity—and concomitant public discussions—aimed at pushing through structural, social and economic reforms. These reforms are meant to improve productivity and ensure that the first two arrows of “Abenomics” (monetary and fiscal stimulus) translate into long-term, sustainable economic growth. Topping the government’s agenda will be passing legislation to make it easier for companies to hire and fire workers, to increase competition and productivity in domestic agricultural markets, and to encourage greater corporate investment at home. Meanwhile, the ruling coalition appears to have reached a consensus on security legislation and will most likely pass defense reforms enabling the Japanese Self-Defense Forces to provide logistical support to Japan’s allies in distant conflicts and authorizing the military to employ force to rescue Japanese nationals abroad. These will be accompanied by a streamlining of the command structure of the Ministry of Defense and the Ground Self-Defense Force to improve the military’s ability to respond quickly to a crisis.
The reaffirmation of strategic and security ties between the United States and Japan will feature prominently during Prime Minister Shinzo Abe’s April visit to the United States and expected speech before both houses of the US Congress. Also at the top of Abe’s agenda will be securing congressional support for White House efforts to fast-track negotiations over the Trans-Pacific Partnership, which Japan has signaled it is ready to join. Japanese accession to the proposed agreement continues to face political obstacles at home, but in Stratfor’s view these are surmountable; progress is now more dependent on the US Congress authorizing trade promotion authority. Either way, formal agreements on the Trans-Pacific Partnership are not likely within the second quarter.
Weak inflation, corporate investment and consumer spending in recent months have prompted expectations that the Bank of Japan will expand its purchases of Japanese government bonds this quarter in an effort to further weaken the yen to spur inflation and boost exports. Although such a move cannot be ruled out, a major expansion of the current quantitative easing campaign remains unlikely in the near term, especially with energy prices set to remain low throughout the quarter. Recent comments from Japanese authorities reinforce this view, emphasizing the government’s expectation that conditions will improve in the second half of the year as consumer and corporate spending recover.
In our annual forecast, we still considered a Russia-Japan deal on the lingering territorial dispute and on energy and natural resource investment likely. However, that was based on an expectation that European pressure on Russia would ease, giving Japan a little more leeway internationally. Both Tokyo and Moscow still want a deal, but the window of opportunity is closing rapidly, and continued international consternation with Russia will further constrain Japan’s decisions. Abe’s decision to forgo a visit to Moscow for the Russian commemoration of the end of World War II underlines the resumed wariness between Tokyo and Moscow.
Although Japan will not be sending its prime minister, South Korean President Park Geun Hye and North Korean leader Kim Jong Un are both likely to attend the ceremony. This would be Kim’s international debut and would further highlight the attempted shift in North Korean orientation (at least politically) away from China and toward Russia. It could also provide Moscow an opportunity to play mediator and arrange some side discussions between the North and South Koreans, possibly without U.S. or Japanese attendance.
Asean progresses toward integration
In our annual forecast, we noted that although Asean economic integration plans would not be realized in full by the Dec. 31, 2015, deadline, the year would nonetheless bring significant activity and tangible strides toward building a regionwide free market for trade, labor and capital. In the second quarter, Asean members will hold a number of important meetings toward this end, including the 2014 annual Asean summit (April 24-27), meetings with a variety of Asean’s major external trade and investment partners, and several regionwide conferences and working sessions on legal and regulatory reform. These meetings will coincide with regulatory reform efforts in key Asean member states, namely Indonesia, in an effort to attract greater foreign investment in infrastructure development and manufacturing.