Macroeconomic update: Asia
In its position as the fastest-growing region in the world, Asia has played a significant role in global economic growth. We hear from two experts – Vincent Tse, IR director at China Resources Beer, and Frederic Neumann, co-head of Asian economic research at HSBC, who give us an insight into the current macroeconomic issues within the region, and how IROs can respond to them.
What do you feel are the main macroeconomic issues in Asia at the moment?
Frederic Neumann: One key risk facing Asia in 2018 stems from the US monetary tightening cycle: should the Federal Reserve hit the brakes harder than expected, this could raise funding costs across Asia and thus slow growth. On the other hand, the region’s macroeconomic balance sheets look decidedly robust, so a gradual tightening path by the Fed will likely be something Asia will be able to take in its stride.
Vincent Tse: Innovation and technology are key to accelerating growth and driving returns for companies and investors in China. The robust innovation scene in Asia has led not only to developments in e-commerce and digital business, but also to opportunities for the wider application of technologies. This will lead to industries such as big data and artificial intelligence integrating more and more into the real economy, acting as a new growth engine for the region.
How has the macroeconomic landscape changed over the past 12 months?
VT: China is playing an increasingly crucial role in shaping the region’s economic dynamics. The renminbi is expected to become a global currency as China bids to open up its financial and capital markets ahead of the trade boost created by the Belt and Road Initiative. This visionary scheme will boost connectivity between Asia and other regions, opening up new markets for rising affluence and consumption in Asia.
In addition, as China moves into a new era of development, there has been a stronger focus on supply quality and economic rebalancing. A number of initiatives, such as Industry 4.0 and Made in China 2025, have been announced as China aims to move up the value chain. The supply-side structural reform will improve the supply and demand system, boost the profitability of companies and lower production costs.
But we must not ignore uncertainties and risks in Asia, including geopolitical tensions, sudden capital outflows, the deterioration of banks’ balance sheets and increasing external debt levels. The region also continues to face serious long-term challenges, such as a rapidly aging society and slow productivity growth.
FN: The economic outlook for Asia has improved markedly over the past 12 months or so. Trade in particular has rebounded sharply, reflecting soaring demand from advanced economies and China. This benefits the region’s highly trade-dependent economies. In addition, despite some tightening measures being applied in China, relating to financial, real estate and environmental matters, growth on the mainland has stayed remarkably robust. This not only reflects an improved trade performance of the Chinese economy but also a broadening of domestic growth drivers away from construction toward consumption, services and high-tech manufacturing.
How are these issues affecting IR activity, and how should IROs respond?
VT: In this context of steady growth as well as risks in Asian economies, IROs must thoroughly understand how the main issues and changes will affect their companies and effectively address those issues while articulating their key messages.
Experienced IR professionals should be involved in and drive dialogues and discussions with the capital markets on relevant topics. For example, how could the internationalization of the renminbi, as well as the Belt and Road Initiative, benefit or harm companies? How will a company accelerate innovation and adopt an advanced business model to drive growth?
Furthermore, given the increasing risk of capital outflows in Asia, IROs should keep a close eye on their shareholder base and concentrate more efforts on local and long-term investors and less on sources of capital from overseas.