A construction site for residential buildings by Chinese developer Country Garden is seen in Tianjin on August 18. The struggles of Country Garden and other Chinese developers are just one of many problems that are injecting uncertainty into the global economy going into 2024. Photo: Reuters
Opinion
The View
by William Pesek
The View
by William Pesek
China downturn, Israel-Hamas war, US election strife – is 2024 already doomed?
Between China’s property crisis, continued tightening by central banks, surging oil prices amid the Israel-Hamas war and US political dysfunction, it’s hard not to wonder if next year might already have been written off by investors
This crazy roller coaster of a year still seems to have some spills and thrills in store for Asia in the home stretch to 2024 – all too many, perhaps.
Between China’s deepening property crisis, continued US Federal Reserve tightening and surging oil prices as Hamas and Israel wage war, it’s hard not to wonder if the year ahead might already be a wash for Asia and investors hoping to harness the region’s growth prospects.
Take Japan, where government officials and economists are busily lowering projections for 2024. Just a couple of months back, Tokyo was abuzz with optimism about its best recovery in a decade and the Nikkei Stock Average trading at 30-year highs, winning big bets from Warren Buffett and his ilk.
Traders were convinced, meanwhile, that the Bank of Japan (BOJ) would soon begin exiting more than 20 years of quantitative easing – but not any more. China’s downshift is unleashing deflationary forces at a moment when Asian economies are relying on their top trading partner to act as a growth engine.
When asked why the BOJ isn’t tapering or preparing to raise interest rates, governor Kazuo Ueda has taken to signalling that it all depends on China. So has Bank of Korea head Rhee Chang-yong.
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Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
These U-turns in 2024 prospects in Tokyo and Seoul are emblematic of pivots taking place across Asia. The default risks bedevilling China’s property sector have officials in Bangkok, Jakarta, Kuala Lumpur, Manila, Singapore and beyond bracing for a turbulent year ahead.
China’s fragility can even make good news seem bad. Last week, the International Monetary Fund (IMF) said the 10 Association of Southeast Asian Nations economies are a “bright spot” amid global turmoil risks, but not if China’s property developers keep missing bond payments and Asia’s biggest economy exports deflationary forces.
The highest US bond yields in 16 years are also a game-changer. Increases could accelerate as oil market dynamics exacerbate global inflation risks.
Just a couple of months ago, traders from Wall Street to Hong Kong were betting that Fed chairman Jerome Powell’s team was done tightening. The sudden burst of chaos in the Middle East collides with hot US labour markets, returning the Fed to inflation-fighting mode.
US Federal Reserve chair Jerome Powell speaks during a news conference in Washington on March 22. Photo: Getty Images
Rising yields have US-based economists wondering if additional Silicon Valley Bank-like blow-ups lurk just below the surface. In Tokyo, the Financial Services Agency is scrambling to stress-test at least 20 systemically important banks. Surveillance efforts are also being stepped up everywhere, from the European Central Bank to the Reserve Bank of Australia.
It is impossible to predict which new stresses might emanate from Israel’s military response to Hamas’ October 7 attack. Russia’s continued assault on Ukraine is a similar conundrum.
“The big upside risk to oil prices would materialise if other suppliers like Saudi Arabia, or the US, are unwilling or unable to make up the difference,” analysts at Gavekal Dragonomics wrote. “And even if a broader conflict is avoided, the lack of any near-term peace dividend in the Middle East will dampen economic development and infrastructure improvements across the region, raising the risks of more supply shocks in the future.”
One wild card is currency intrigue. Just about the only thing on which US President Joe Biden’s Democrats and Republicans agree is containing China’s rise. On Monday, Biden further tightened restrictions on Chinese access to cutting-edge tech, including semiconductors and chipmaking gear. Odds are that accusations China is manipulating exchange rates to boost exports will be a hot election issue.
The irony is that the yuan’s decline reflects economic fundamentals. For years, the IMF and the US Treasury Department urged Beijing to let markets decide the yuan-US dollar exchange rate. Considering the slowest growth in decades, cracks in the financial system, record youth unemployment and China’s fast-ageing population, it’s a wonder the yuan is only down about 6 per cent this year.
Another problem is President Xi Jinping’s penchant for self-inflicted wounds. The crackdown on China’s biggest tech companies launched in late 2020 still perplexes foreign investors. It quickly expanded from Alibaba to Didi Global, Meituan, Tencent Holdings and others. It destroyed trillions of dollars of wealth and had Wall Street investment banks debating if China is “uninvestable”.
Then came the draconian Covid-19 lockdowns, a period from which the economy hasn’t recovered. Had Beijing worked harder from 2012 to 2020 to create adequate social safety nets and a livelier private sector, China would have been better equipped to withstand the pandemic. Now, its determination to soft-pedal stimulus and reform efforts has Asia bracing for possible contagion risks.
Here, the rising US dollar is more menace than tailwind for 2024. The more the Fed raises rates, the more the yuan slides. That makes it even harder for China Evergrande Group, Country Garden and other giant developers to make payments on offshore debt.
Factors in the United States can’t be ruled out, either. Along with the US government debt topping US$33 trillion, Republicans are threatening to shut down the government and playing politics with raising the debt limit. As election season intensifies and former president Donald Trump angles for a comeback, Moody’s might join the other agencies and downgrade the US credit rating, further boosting US yields.
Put it all together and 2024 might already be something of a lost year for Asia’s economies and investors betting on the globe’s most dynamic region. About the best one can say is that the year ahead will be a time for buckling those seat belts.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
