No slowing down

High levels of economic activity are expected in China, Cambodia, Myanmar and Thailand this year, thanks to the growth of their middle classes and urbanisation, while Japan will remain a very important part of the global system, banking experts say.

Tim Evans, head of commercial banking for international markets (Asia Pacific), HSBC. Photo courtesy of HSBC

South Korea, meanwhile, will also be very active economically. Along with their counterparts from China and Japan, Korean companies will continue to invest heavily in Asean, particularly in Vietnam.

“Key drivers are going to be strong demographic growth and the constant movement of people into the middle classes,” said Tim Evans, head of commercial banking in international markets for Asia Pacific with HSBC.

“Once you get into the middle class you spend more on vacations, on consumer items, and this is Maslow’s Hierarchy of Needs — first you need food and then shelter and then you get to the point where you buy a car or two cell phones or go on holidays, and that will drive a lot of the economic activity in Asia.”

HSBC projects that 66% of the world’s middle class will be living in Asia by 2030. Another regional trade driver is urbanisation. For example, China is adding 10 million people to its cities every year which drives the need for high-rise buildings, improved metro systems and shopping malls.

The Chinese economy is also encouraging as its gross domestic product (GDP) is still growing by more than 6%, adding the equivalent of a Swedish or Turkish-sized economy every year, with knock-on effects throughout the region.

“There are opportunities within Asia for countries to trade among themselves,” Mr Evans told Asia Focus during an interview in Bangkok.

Even if the US-initiated Trans-Pacific Partnership (TPP) is killed by the new administration of Donald Trump, the Free Trade Area of the Asia-Pacific (FTAAP), which covers 21 countries including the US and China, and the Regional Comprehensive Economic Partnership (RCEP) will provide opportunities for Asia.

Mr Evans believes both agreements will be ratified as there is no “political rhetoric” suggesting that either is in danger.

He also said China’s assertiveness was symbolised by its One Belt, One Road initiative, which envisages extensive infrastructure building, with a substantial multiplier effect via contractors, subcontractors and cement manufacturers. Ultimately, the trade benefits could be worth between US$2 trillion and $2.5 trillion.

For example, the high-speed rail line from Kunming in southern China to Laos, Thailand and potentially down to Singapore will open up a host of new market opportunities from a trading perspective.

According to Mr Evans, HSBC’s view is that Mr Trump and his inward-looking policy will have little impact on what people buy and sell in this part of the world.

“The number one driver of Asian trade will be economic activity. The higher the economic activity you get, the more trade you get. The second big driver is the price of commodities and commodity prices are driven again by economic activity,” he said.

“It is not just about ‘Let’s trade among ourselves because we’re not trading with the US anymore’, absolutely not. And it’s not a question of the US not trading with Asia. There may be slightly reduced trade with Asia but it’s not going to change overnight.

“Mr Trump made certain statements in the election campaign and we have to see how he follows through on them, but the idea that this single person in the US will have all this omnipotent power across the region is not right because there is underlying economic activity and there are still people buying from one another here.”

It is no longer simply a case of China manufacturing and selling to the West, as China is manufacturing and selling to others in Asia as well, he said. The world has moved from the binary “manufacture here, sell there” state and is much more integrated.

Douglas Lippoldt, senior trade economist at HSBC, said now was the time for Asia to seize the initiative on trade. While there has been a striking rise in populist and nationalist sentiment in Europe and the US, Asia still views trade positively, especially in emerging markets.

Increased market openness in the region has clearly helped improve economic performance and Asian leaders are pursuing more trade liberalisation and integration initiatives.

“Now is the time to advance these, sending a signal to the world that trade remains central to Asian economic policy and that Asia is indeed open for business,” said Mr Lippoldt.

Immediate action is needed to conclude the RCEP, implement the Trade Facilitation Agreement under the World Trade Organization (WTO) and for Asia to support the nearly-completed WTO Environmental Goods Agreement, he said.

“Among the proposed mega-regional accords, the RCEP has emerged as the leading contender for early completion. It offers the best prospect for deep, large-scale trade liberalisation covering goods, services and investment in an integrated manner.”

The RCEP, according to Mr Lippoldt, has sufficient scale to shape the rules of trade across a large swath of the global economy since its partners include nearly half the global population and nearly a third of world GDP. It also offers participants potential access to three of the largest consumer markets in the world — China, India and Asean.

“Thus, although the RCEP has taken a less ambitious liberalisation approach than the TTIP (Transatlantic Trade and Investment Partnership) and the TPP in terms of the depth of liberalisation proposed, it partially compensates through its tremendous scale,” he explained.

He said the RCEP could deliver annual welfare gains for participants of about $600 billion, or 1.8% of regional GDP, while benefits may also come in part from lowering of traditional barriers such as tariffs.

So far, there is a preliminary agreement on tariff elimination on 80% of all goods, possibly with a longer phase-out period for sensitive items. However, the bigger challenge will be services liberalisation, including mutual recognition agreements (MRAs) that could permit more cross-border professional services activity in fields such as engineering, accountancy or architecture.

There are also challenges in trade-related issues such as intellectual property and investment protection with proposed provisions going beyond existing WTO commitments.

While steady progress has been made, it is not likely that the RCEP talks will conclude before the end of the year. The 16th round of negotiations in Indonesia from Dec 6-10 produced a successful conclusion on terms elating to small and medium enterprises and economic and technological cooperation. The 17th round is scheduled from Feb 27 to March 3 in Kobe, Japan.

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