Growth Dynamics for Asia in the Trend of Deglobalization

Growth dynamics for Asia in the trend of deglobalization

Contents

2017: A ray of hope amidst uncertainty 2 China 2017: resilience in the face of uncertainty 13 Unleashing the Value of the Industrial Internet of Things 19 Voice of Asia 36 Things you need to know about Asia in 2017 38 Trade to Trump protectionists and boost global growth 55 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

1 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

2017: A ray of hope amidst uncertainty

The latest trade Both the global economy and global trade look likely to outperform expectations in 2017. data show The US economy is looking up, although where President Trump China's imports will find the funds for his ambitious agenda is still unclear. The and exports stimulative impact of his tax cuts and infrastructure spending may combine with new trade restrictions to drive up inflation. have rebounded The latest trade data show China's imports and exports have strongly and the rebounded strongly and the trade surplus remains high, proof of trade surplus the economy's resilience. But the significant trade imbalance with US is a big potential source of conflict. China could mitigate this by remains high, offering the US greater market access and helping fund a part of proof of the the US's infrastructure projects. economy's In spite of uncertainties in the Sino-US relationship, the general economic outlook for ASEAN countries is positive this year. That resilience. is mainly because global demand will pick up, boosting export sectors, and domestic drivers of growth are likely to be more positive too. However, the prospect of protectionism in the US is a real threat.

The pick-up in commodities prices is already having a positive, visible effect on the Australian economy. However, there are some uncertainties: Australia's growth is tied to the Chinese economy, which is currently in a transition. And there is a risk of growing protectionism from the United States. But chances are that either these potential problems don't occur, or that they won't be big enough to derail the 2017 outlook for smaller developed economies such as Australia's.

2 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

The future looks brighter than it did a year ago – yet it is also much more uncertain. On the bright side, the world economy is in much better shape than it was, and this is likely to spill over into world trade. The US economy is also looking much stronger than it has been in a long time, and the surprise election of Donald Trump has had a positive effect on markets there. His stated intention of improving infrastructure in the US has also been received positively. On the other hand, his protectionist remarks have created worries among many countries (not just Mexico and China) .

So what are the likely policy changes in the US? How will they affect Asia's economies which are critically dependent on China's growth?

3 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

United States ••Increased immigration would negate some of the stimulus The election of a new US president, enforcement and stronger impact of lower taxes and increased particularly one of a different political border controls—Policies that government spending. party than the predecessor, comes former President Barack Obama with the expectation of a shift in put in place regarding enforcement One of the biggest unknowns is policies. While the formulation and under executive directives or how the new administration and timing remain uncertain, the following executive orders are in the process the Congress will choose to pay broad policy changes are likely to of being rescinded. It is not certain for the tax cuts and infrastructure be debated this year and possibly what other actions will be taken to spending. Federal deficits will be enacted given that the president's increase enforcement, but President significantly larger if Congress passes party controls both houses of Trump remains committed to large tax cut and infrastructure Congress. building a wall on the US-Mexican spending bills without taking steps border. to curtail spending. Even without ••Corporate and personal income these changes, the budget deficit tax reform—While the top rates ••Repeal and replacement of was on track to rise because of for both types of taxes will likely be Obamacare—Popular provisions projected rises in social security and lowered, the details will determine of the 2010 Affordable Care Act Medicare spending, reflecting an aging what the final impact on individual (Obamacare), such as the ability to population. tax bills will be. The details will also keep young adults on a parent's ultimately determine how stimulative health insurance plan until the age Although the new administration to the economy (and how costly to of 26 and guarantee of coverage may cut other entitlement programs the Treasury) the actual plan will be. for preexisting conditions, will such as medical care for the poor most likely remain in the American ••A federal infrastructure (Medicaid), changing the long-run path Healthcare Act (ACA) spending program—No specific of the budget without reforming social details of the spending program ••Regulatory reform across security and Medicare will be difficult. have yet been announced, but agencies—One of the first actions a spending program would spur in this area will likely involve economic growth over what it substantial changes to the 2010 otherwise would have been. Dodd-Frank Wall Street Reform. ••Review of existing trade deals Following the election, the major and a move toward bilateral US stock indices reached new enforcement—The United States heights on expectations of at least currently has free-trade agreements some of these actions actually (FTAs) with 20 countries. In 2016, being taken. But with the economy the United States had a trade deficit nearing full-employment, there is of USD 502 billion, comprised of a also an increasing awareness that USD 750 billion deficit in goods trade some of these actions, particularly partially offset by a USD 248 billion the stimulating impact of tax cuts surplus in services trade. Any action and infrastructure spending, along by the United States to withdraw with new trade restrictions may be from or fail to abide by the terms of inflationary. an existing FTA could invite counter- measures, putting at risk some We estimate that the Federal Open portion of the USD 2.2 trillion in Market Committee (FOMC) will raise goods and services that the United rates three times this year (25bps States exports annually. i each). However, should inflation start accelerating at a rate that alarms the FOMC, rates might increase faster and possibly in larger increments than would otherwise be the case. This

4 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

China However, this large trade surplus has After a troubled year deflating housing made trade imbalances between bubbles, stabilizing the currency China and the US the single biggest and keeping a tight rein on the stock sticking point (USD 250 billion in 2016, market, the latest trade data surprized accounting for more than half of the policymakers. It showed that, not only total trade deficit of the US that year) does the trade surplus remain high, in the Sino-US relationship. It is highly but also both exports and imports unlikely that there will be a full-blown have rebounded strongly. trade war between the two largest economies in the world. Yet there is a This strong performance on the trade high risk of developing trade "friction" front comes against the backdrop as top leaders in both countries of (1) regional governments in Asia become more assertive. Already supporting trade liberalization and several leading domestic think-tanks integration; and (2) leading indicators in China have highlighted “external of global trade (such as container risks” (a euphemistic reference to the movements and port volumes in evolving and complicated Sino-US emerging Asian economies and China) relation) as the top challenge of this have shown signs of recovery since year. last summer. China's trade surplus is also bolstered by the continuing depreciation of the RMB exchange rate against the dollar.

Trade imbalances between China and the US

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5 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

But China is not alone. a number of for the US to accuse China of Favorable liquidity is like anesthesia countries (Mexico, Japan, Germany currency manipulation, because given to a patient who is undergoing and China) have also been singled China has been trying extremely surgery. In other words, structural out by the US president. Mexico has hard to push the RMB exchange reform cannot proceed smoothly taken the brunt of US criticism so far rate higher for over a year, even without cheap money, and certain resulting in the peso plunging by 16% at the cost of halting the RMB's non-performing assets can only be since the US elections. internationalization and hurting turned around through reflation or domestic trading companies which inflation and economic growth. But as China is no Mexico however -- for rely on trade finance facilities. China is stabilizing the RMB exchange several reasons: rate by allowing its reserves (USD 2.99 If the chief objective of the Trump trillion by January 2017, down 7.2% ••First of all, it is easier for the US to administration is to "bring back jobs from a year ago) to run down and put pressure on countries that are to America" and substantially narrow tightening capital controls, liquidity smaller than them and which tend to the bilateral trade deficit with China, conditions are worsening. benefit more from freer trade. the mechanism cannot be a simplistic ••Second, it is a well-known fact that repeat of the 1985 Plaza Accord which In theory, the current economic China's large trade surplus with the resulted in a rapidly appreciating conditions in China call for a more US also reflects a complicated global Japanese yen. A much stronger RMB accommodative monetary policy supply chain which benefits many would have a devastating effect on the (meaning lower interest rates and US companies (Apple is a primary Chinese economy. Although China's cheaper RMB), but in practice this example) far more than China itself. economy is quite resilient, it is still far is less feasible due to domestic ••Third, it is almost certain that from being balanced, with a number and international constraints. A China would retaliate should the of looming challenges such as de- stable exchange rate is seen by US actually start a trade war (for leveraging and maintaining financial policymakers as a precondition of example, by adopting a sweeping sector stability. market confidence. This means more increase in tariffs against Chinese regulation at home. imports). In addition, it is difficult

6 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

For example, the latest development opened up its domestic market both the US and emerging economies) in the continuing saga of deflating adequately to American companies cannot be expected to yield dividends bubbles is that the Government (for example, in health care, financial in the short run. So, for a Trump has announced a series of policies services and entertainment) and has Administration looking for quick wins, limiting real estate financing in 16 not lived up to its pre-WTO promises. China's market access is indeed the cities (including Beijing, Shanghai, Under the Trump administration, most important bargaining chip. With Guangzhou, Xiamen, Nanjing and we are unlikely to see an increase in China firmly in the category of "trade Fuzhou) where property markets exports of US high-tech to China if the surplus countries", meaning that trade are seen to be overheating. The latter does not significantly improve frictions will not vanish, and these will rationale is that the bulk of such market access. Moreover, the US in turn exacerbate capital outflows, trust products originated from bank could argue that China should at least the best policy response for China loans but have been subsequently be reciprocal in terms of giving US to mitigate such "imbalances" is a repackaged. Regulators clearly view Internet companies more access to meaningful market access which could such "regulatory arbitrages" as the domestic market. also reignite reform momentum within reckless risk taking behavior which the country. will undermine China's financial So what are China's bargaining stability. The policy responses from chips? The Regional Comprehensive the People's Bank of China (PBOC) Economic Partnership (RCEP) is being are basically of the ''credit tightening championed by China, and it may without resorting to outright interest gain acceptance by some emerging rate hikes'' type. That said, the bottom Asian economies. However, it has line is that it would be fundamentally little appeal to the US. Can China help against China's economic interests the US with President Trump's much- for the RMB exchange rate to be set trumpeted infrastructure spending at an artificially over-valued level and program? The answer is a resounding therefore China will probably not yes. China could easily help fund part succumb to pressure from the US. of such an infrastructure program. It also makes economic and geopolitical On the other hand, there are several sense for China to engage US measures that China could initiate companies in some of its Belt and to achieve a substantial reduction in Road related infrastructure projects the trade imbalance between China as a trust-building effort. At present and the US. This could be achieved these projects are being undertaken by greater US exports to China or in the typical Chinese way of "learning less Chinese exports to the US or by doing and doing by learning". both. From China's perspective, the US has long blocked exports of its Sharing resources, technology and high-tech products to China. From know-how for building infrastructure the US's perspective, China has not might well prove to be a ''win-win'' situation for both parties. However, collaboration between China and the US on infrastructure spending (in

7 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

ASEAN For example, recent years saw ASEAN indirect effects of elevating business Prospects for ASEAN economies are governments courageously push confidence and so "crowding in" improving this year as global demand reforms whose short term effects private investment could be even picks up, boosting exports. harmed growth but whose long stronger. As a result it is highly likely term benefits are now beginning to that in most countries, inflation will Domestically, 2017 should see a be more visible. Indonesia slashed return, and deflation fears will ebb. partial reversal of the past two years fuel subsidies in early 2015 which which had seen the full contractionary depressed consumer confidence for On the international front, global effect of falling commodity prices some time. Malaysia introduced its growth will be higher this year – hurting rural incomes and goods and services tax in 2015 as compared to 2016 and this will have purchasing power, and forcing ASEAN well, with similar dents to consumer a positive effect on trade, thereby governments to rein in government confidence while also cutting back also helping boost growth in ASEAN expenditure as commodity-related on poorly targeted fuel and other economies. revenues fell. But that cycle has since subsidies. Several countries including turned. For example, crude palm oil Malaysia and Singapore introduced The US economy is now recovering and rubber prices, which are key in measures to rein in consumer debt strongly and is likely to accelerate Indonesia, Malaysia and southern which had been growing too fast while further as growing business optimism Thailand, have risen sharply. also putting controls on the runaway fuels a comeback in capital spending, housing sector. The worst effects of all the missing ingredient in US growth And it isn't just the business cycle that these have been absorbed by now. so far. If the Trump administration is lifting. Recent years saw reforms and the US Congress follow through adopted. Even better still, the initial Governments in almost every on tax cuts, higher infrastructure and disruptions accompanying those ASEAN country are now ramping defense spending and deregulation policy changes have already settled, up infrastructure spending – even without sparking off a trade war leaving the way clear for better in Singapore where infrastructure through protectionism, the US structural policies to be supporting is already good. Thailand's mega economy will see a even stronger ASEAN growth in 2017. transportation projects will also growth. become operational this year. All this will boost growth directly – but the

8 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

This US recovery is unfolding in see themselves at risk in the same conjunction with a firmer recovery way that China and Mexico might be in the Eurozone and Japan, helping as they are less prominent in terms to reinforce these latter recoveries of bilateral trade deficits or weak as well. The Eurozone and Japan are currencies. also aided by oil prices remaining in a ••Given the uncertainty over what sweet spot and by weaker currencies. the Trump administration will do Add in the possible rebounds in large in terms of relations with allies or emerging economies such as India, attitudes towards rivals such as Iran, Brazil and Russia and well above half it might be tempting for some of of the global economy will be enjoying America's interlocutors to push the a better year in 2017 than they had in envelope in some areas so as to test 2016. Provided we do not see a rise in the new administration's resolve. protectionism, there will be a spillover This could create unpleasant shocks from global output expansion into to global business confidence. trade, and ASEAN countries will benefit directly. As a result of trade tensions and rising uncertainty, financial That isn't, by the way, a mere hope. conditions could become The data is already showing these unstable, precipitating several uptrends, with visible signs of global shocks to markets. trade picking up: There are several reasons to expect ••Leading indicators for world continued and perhaps more frequent trade – such as container and air financial shocks. cargo volumes, trade in electronic ••First, the US central bank will components and export orders – almost certainly have to step up are already signaling a rise. the pace of monetary tightening – ••Rising capital spending will boost as US bond yields rise and the US trade with ASEAN economies as dollar appreciates further, financial capital equipment manufacturing conditions in emerging markets relies more on imported which raised borrowing substantially intermediate components. in 2008-2015 will tighten, hurting corporate cash flows. Capital But, there are significant uncertainties will tend to flow out of emerging which could completely reverse the markets, causing disruptions in positive trend in trade. asset prices and further depressing local currencies. ••The Trump administration appears to be serious in wanting to shake ••Second, global inflationary pressures up the way it approaches its allies are rising and this could also feed and other interlocutors. What through to expectations of faster worries ASEAN leaders is a rise in monetary policy normalisation even protectionism against them. But, for beyond the US. now, most ASEAN economies do not ••Third, while the Chinese economy is stabilising, it will experience ups and downs in the near future. Investor speculation about the trajectory of its economy and currency could create further volatility especially in the currency markets.

9 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

••Speculation of Chinese yuan ••Greater integration with likeminded devaluation or its actual weakness countries. Given the US pullout of will certainly create downward TPP, ASEAN nations will explore pressures on ASEAN currencies other options, including pushing a such as the Indonesian rupiah, bit more aggressively for RCEP to Philippine peso, and Thai baht. be concluded and for it to be more But these currencies have become comprehensive in scope than some more resilient over time due to other nations, like India for example, improving fundamentals such as might wish for. Since they are likely strong external accounts, growing to fail in that, and since RCEP is not credibility of their central banks and likely to have much economic punch, much better overall policies the other option is to consider more bilateral deals with each other But ASEAN economies have and other major partners such as improved their resilience to such Europe. But that too has a limited shocks. effect given Europe's pre-occupation with Brexit and its own troubles. ••The key elements of resilience – Bilateral deals with a bullying economic diversification, strong Trump administration may not work financial buffers, room for policy either. The greater likelihood is that response – have improved in most likeminded economies in ASEAN cases. such as Malaysia and Singapore cut ••Compared to the sharp swings more bilateral deals between each in equity, bond and currency other. valuations during the taper tantrum of mid-2013, volatility in ASEAN financial markets has been more restrained in 2016. The Indonesia rupiah for instance has been a relatively good performer despite the series of shocks which caused other emerging market currencies to take severe hits.

10 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

Australia ••And China's economy has also Until now the TPP has been the main gathered speed in response to a game for Australian trade policy, with range of stimulus measures. the RCEP seen merely as ''TPP-lite''. ••Even more importantly, across the last But if the TPP is soon seen as dead nine months – a period in which global in the water, then Australia's obvious politics has been compelling theatre Plan B is to consider joining the RCEP. – there have been growing signs of So far, however, Australia hasn't given economic improvement. up. The response of the Australian Prime Minister to the withdrawal The IMF sees faster global growth of the US from the TPP was that this year than last year. In fact its "Certainly there is the potential for latest forecasts, issued in January China to join the TPP … There is (http://www.imf.org/external/pubs/ also the opportunity for the TPP to ft/weo/2017/update/01/index.htm), proceed without the United States". upgraded its global growth forecasts Australia has also been pushing for 2017. In addition, a range of leading for Indonesia to join a revamped indicators already pointed to developing TPP process as well. Yet, provided momentum for global trade. it doesn't rapidly slide into a tariff war, this new round of diplomatic These cross-currents may already manoeuvring over trade isn't really a be seen in the Australian economic risk to Australia's 2017 outlook. landscape. The earlier phase of slowdown in China's economy Why not? The world and Australian combined with a pickup in global supply economies faced some major shocks of resources saw industrial commodity over the past decade, including a range prices fall sharply from their 2011 peaks. of economic upheavals and political This in turn led to a sharp squeeze on storms. That perspective is important, Australian national income growth. because it is a reminder that the risks Subtract inflation and population to the 2017 outlook may well not be growth, and what one got was real triggered or – even if they are – that living standards in Australia dropping they will not be as bad as some of the between late 2011 and mid-2016. tempests of the past decade. Sure, it is relatively easy to conjure up scenarios in which the dry underbrush of the moment is set alight.

Yet the most likely set of outcomes around the globe in 2017 is actually happier news than is generally recognised:

••President Trump has inherited an economy with a degree of momentum. Moreover, if the new President prioritizes infrastructure spending, trade will get a boost.

i.Bureau of the Census and Bureau of Economic Analysis, US Department of Commerce, "U.S. international trade in goods and services, November 2016," http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf.

11 Growth dynamics for Asia in the trend of deglobalization | 2017: A ray of hope amidst uncertainty

But that ''income recession'' is already That said, the boost to Australian fast disappearing. Better commodity growth from lower interest and prices have seen national income exchange rates is starting to lose growth rebound sharply, and there steam – housing construction is appears to be more good news on nearing its peak, and retail's run is the income front for Australia in the moderating. pipeline. Australia's trade balance moved out of its customary red ink On balance, that mix should keep the firmly into the black in late 2016, and it home fires of growth in 2017 burning seems set to stay there through 2017. by enough to leave unemployment relatively steady, and by enough And with incomes finally growing for to see Australia move past the the first time in a while, that should Netherlands to record the world's underpin solid growth outcomes. longest ever spell without a recession.

12 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

China 2017: resilience in the face of uncertainty

13 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

2017 presents 2017 presents both challenges and opportunities for China as the economy moves from an investment and export oriented both challenges model to a consumption and services oriented one. Such a transformation inevitably results in a slower growth rate and this and opportunities could create a certain financial ''fragility'' in the short term. The for China as good news, however, is that domestic demand has held up even in the face of a slowing economy, which is in itself a consequence the economy of the continued and successful transformation of the Chinese economy into an urbanized, consumer oriented one. moves from an The challenges facing China this year come from politics: the investment and possibility of a rising tide of protectionism sweeping over the export oriented world, trade friction with the US, and possible black swan events such as the imminent French elections, are some examples. model to a The reality is that while China's domestic demand is growing, it's trade sector still accounts for about 40% of GDP and 2017's consumption and current account surplus is likely to be around 2-3% of GDP. services oriented Concerns over protectionism and trade friction with the US might quite possibly constrain China's capacity and/or desire to one. allow a depreciation of the RMB. There are clear signs already - Chinese leaders have been playing down the chances of an RMB depreciation since last December and at the same time carefully deflating housing and financial bubbles. This has put a greater burden on fiscal stimulus, the only remaining tool they have for promoting growth in the economy. Hence the emergence of a certain financial fragility in the Chinese economy. In fairness, the roots of this financial fragility lie in the large fiscal stimulus of RMB 4 trillion in late 2008 and the continued debt build-up that followed which was the result of a policy bias towards a high economic growth rate. So the real challenge this year is not so much protectionism or trade friction with the US but whether or not policymakers will tolerate a slower growth.

14 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

••Trade friction between China and the US - Our baseline scenario is that that there will not be a full- blown trade war between the two largest economies in the world but the risk of a certain significant trade "friction" cannot be ruled out. The Trump administration seems to be quite serious about reducing its trade deficit which it says is a result of "unfair trade". Indeed, China's trade surplus with the US (over USD 250billion in 2016) has dwarfed bilateral trade imbalances between the US and other major trading partners. The fact that the US Treasury will probably not follow through on President Trump's campaign pledge of dubbing China a "currency manipulator" suggests that the Trump administration is likely to push China in other areas such as market access.

••Financial risk - China's progress on deleveraging has been slow in recent years. By 2016, debt/GDP ratio had ballooned to roughly 270%, potentially undermining the soundness of the financial system. One indicator of the stress on the financial system was late last year's A strong labor market reduces the many jobs although not much GDP mini crisis in the bond market. The need to ''reflate'' the economy in a traditional sense. Why? Service best way of mitigating financial Given the robust labor market, there sector in China is under-developed sector risk is to reduce leverage, is no need for China to stick to the but improving services such as better (mainly state-owned enterprises overtly ambitious target growth rate. experience of travel may not generate (SOEs) and local government debt) Of course there will be concerns over much GDP even though many jobs will but that also means a slower unemployment and social dislocation be created. economic growth rate. but the reality is that China’s labor market is tight and rural surplus labour has reached the Lewis turning point and labour no longer transfers to cities in large numbers. Moreover, China’s population is aging and hence the labour force to population ratio in trending downwards. In addition, a vibrant new economy is generating

15 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

Take the RMB's "weakness" in measures, although temporary, could Dynamics of future growth stride deter foreign direct investment (FDI) Let us look beyond 2017. What does the One major challenge faced by because companies are concerned future hold for China? There are several China is the acceleration of capital about the risk of profit/dividend prospects for growth. Here are four outflows which is exacerbated by repatriation. possible trends: depreciation expectations. China's 1. The rising tide of urbanization foreign exchange reserves have Though muddling through has proven Since the government in 2014 come down from USD 3.23trillion to be the optimal strategy in the past unveiled its new urbanization in January 2016 to USD 2.9trillion thirty years, where the RMB exchange program which aims to transform in January 2017. Declines of foreign rate is concerned, we feel the current rural workers into urban dwellers by reserves is the result of corporate situation may call for something offering them urban dwellings, more external debt repayments, their desire bolder. This is because, political than a dozen new city clusters have to acquire relatively under-valued factors aside, several challenges emerged across the country. These overseas assets and a diversification await China in 2017, the toughest city clusters are part of the so-called of consumer preferences. The one being a sooner-than-expected ''one-hour economic circles'', linked Government, understandably, wants monetary tightening by the Fed by high-speed rail and extensive to stabilize both the RMB exchange which could make the dollar even underground subway systems, and rate and foreign reserves. However, stronger. Tax cuts in the US will, in all have substantially strengthened given that China is the world's largest likelihood mean that the dollar will the transportation and trade links trading nation in the world and at become even stronger, prompt the between villages, towns and cities. the very center of global supply Fed to react in a more forceful way Migrant workers, a large population chains, certain draconian means in view of a full-recovery of the US group who have long been of capital controls may result in economy. Therefore, it would be wise neglected, should also be integrated adverse effects on financing and for policymakers to accept sporadic into the urbanization program as even normal procurement for firms overshooting of the RMB exchange they are already urbanized and have operate in China. In addition, these rate instead of running down great potential as future consumers. reserves.

16 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

2. Servicing China's aging shrinks and fewer young people population willing to work on assembly lines China's population aged rapidly as their parents did. In a global with 15% of its population aged context, China needs to shift from over 60 in 2013. This proportion is a labor-intensive goods exporter projected to grow to 18.5% or 280 to a high value manufacturing million by 2025. With changes in the powerhouse. As the cost of demographic structure, there will industrial robots continues to be a growing demand for pension, fall, we expect to witness a mass medical services, healthcare adoption of automation in China's insurance, asset management and manufacturing. tourism in China. 3. Technological/Internet Conclusion innovation Notwithstanding various challenges Every major technological such as exchange rate management breakthrough serves as a catalyst and possible external shocks, China for industrial revolution. From still has many policy options. It would big data and cloud computing to be wise to lower the GDP growth target artificial intelligence and virtual and to focus on the quality of growth reality, emerging technologies rather than on numbers. Indeed, the are disrupting business in group on overall economic reform unprecedented ways. But seems to be well aware of this. Recently, technology is an industry game in the run up to the annual NPC and changer only when it acts as a tool CPPCC Sessions (1st week of March), that enables companies to cut they announced that the key goals for expenses and increase productivity. 2017 are – addressing over capacities, We remain cautiously bullish on mitigating financial risks, and upgrading every new technology and the the manufacturing sector. changes it brings about. 4. Industrial automation and artificial intelligence The fourth industrial revolution is expected to see more human jobs replaced by robots. The Chinese government is keen to promote automation in its vast but inefficient manufacturing industry as a way to cope with increased competition and rising labor costs. China has seen its working age population

17 Growth dynamics for Asia in the trend of deglobalization | China 2017: resilience in the face of uncertainty

The key goals for 2017 are – addressing over capacities, mitigating financial risks, and upgrading the manufacturing sector.

18 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Unleashing the value of the Industrial Internet of Things

In order to be successful and generate further growth, companies will use the Industrial Internet of Things to improve efficiency by optimizing the supply chain, boost revenues by enhancing customer experience and upgrade the risk management by improving product safety. However, a transformation from interpretation to prediction in the usage of data is crucial.

19 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

20 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Value of IoT in the Industrial cross-industry business applications, In China, the ecosystem for IoT has sector and USD 667 billion from vertical become increasingly mature as In today's business world, all industry applications. By 2020, the demand for industrial IoT applications companies are facing a challenge total expenditure on IoT is expected continues to increase. According to that can be turned into a great to reach USD 3.011 trillion, and the CIC estimates, the scale of Industrial opportunity: the transformation from afore-mentioned market segments IoT in China reached RMB115.7 billion a reactionary towards a visionary are expected to grow to USD in 2014, accounting for 18% of the approach. Retrospective analysis 1.534 trillion, USD 566 billion and overall industry of IoT, while it today and delayed responses are no longer USD 911 billion, respectively. This reaches approximately RMB150 suitable for today's rapidly changing represents compound annual growth billion, a growth rate of 29%. By 2020, business environment. As with rates (CAGR) of 29%, 30% and 8%, Industrial IoT is expected to account the increased use of sensors and respectively. for 25% of the overall IoT with an improved quality of data, Internet of industrial scale exceeding RMB450 Things (IoT) allows companies to act IoT projects are currently mostly used billion2. with foresight, preventing significant in the industrial sector. IoT Analytics losses and creating value. believe that the manufacturing The source of value and how it industry accounts for around 25% works According to Gartner, the number of of IoT applications while Harbor Given the great potential of Industrial IoT equipment installed worldwide Research and CISCO estimated its IoT, we need to reflect on the ultimate reached 6.4 billion in 2016, percentage at 27% and Gartner origin of its value. IoT creates an representing a 30% year-on-year calculated a 15% share1. Although overall new type of value, which is growth, and it is expected to reach estimates by research firms vary, the particularly different from the one 20.8 billion in 2020. The global manufacturing industry takes the derived from products and services: endpoint spending on IoT was about lead in IoT. The figure below shows self-managed information and USD 1.414 trillion in 2016, composed Gartner's forecast of the overall IoT insights. More precisely, IoT can turn of USD 546 billion from consumer market and Industrial IoT applications. almost anything into a source of applications, USD 201 billion from (Figure 1) relevant information.

As early as 2015, Deloitte for the first time published the concept of Figure 1. Global Endpoint Spending on IoT and Industrial IoT the new value source derived from 3,500 IoT, the so called "information value 3,011 loop" (Figure 2). The core question 3,000 of every company when defining a 2,500 strategy is: how do we create value and how can this value be captured? D

S 2,000 The IoT is changing the way of how U

n 1,1 companies create value: traditionally, 1,500 1,183 value creation was considered to be b i l o 939 1,000 driven by the concept of the so-called 52 "value chain" – a linear series of steps, 500 11 177 212 that transforms inputs into outputs. The IoT technology allows to capture - the information generated by these 201 2015F 2016F 2020F products and services – information IoT Expenditure Industrial IoT Expenditure that creates value in a fundamentally different way, put together and Source: Gartner, Deloitte Research explained in the "information value loop".

21 Figure 2 Information value loopGrowth3 dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

The information value loop begins with the creation and interaction of information in a new environment. Sensing technology enables every action to produce information, leading to a stage of "creation". The network, typically provided and managed by the communication service providers, connects the "creation" and "interaction" stages. This connection releases information and activates the rest of the closed loop – leading to an all-new form of opportunity for cooperation.

Stages Technologies

Value drivers Initiating, changing, or maintaining an event or state

Discernment of patterns among data that leads to action Use of sensors to descriptions, generate date or predictions about a physical event or state Gathering information created at different times or from different sources ACT

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It should be noted that the information value loop is a closed loop, which means behavior—the state or behavior of objects in the real world—generates information. This information is then used to predict future behavior. The information which makes the closed loop complete and creates value, will go through the various stages of the closed loop, whereas each stage is driven by a specific "technology." A "sensor" that creates information monitors every action. The information achieves interaction via a "network", and then "standards" of technology, law, regulation, or the society bring them together across time and space. "Augmented intelligence" is a generic term referring to analytical tools that support information analysis. The information value loop is ultimately accomplished by "augmented behavior ", i.e. technologies that help to be compliant concerning prescribed actions, leading to improved behavior.

22 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

IoT can significantly reduce the cost of computing and data storage, overturning previous definitions and frameworks for business value. We can think about the business value and opportunities generated by IoT via the following indicators (Figure 3).

Figure 3 Dimensions for measuring the business value of IoT

A company needs to maintain a balance of revenues, expenditures and assets to ensure its operation, while the management of most companies focuses on how to reduce costs, improve Financial indicators asset efficiency and relief the debt burden – and not on exploring ways to develop new sources of revenue through new and innovative programs.

Changes in financial indicators reveal three core business processes of a company: customer lifecycle, product lifecycle and equipment lifecycle. At present, most companies invest mainly in the equipment lifecycle (such as optimizing equipment operation and boosting usage). For Operational indicator the customer lifecycle and product lifecycle, intelligently connected equipment can not only provide new analysis and performance, but also effectively manage the way companies develop customers and products. Moreover it can provide information about the customer lifecycle, the product as well as the related revenue and profit in detail.

Most of the current IoT solutions are used in specific circumstances, such as inventory reduction or mechanical breakdowns. Only a small part of these companies use the data from IoT to improve the overall production process and product design. If companies seek to make the Business performance most of IoT solutions, a long-term perspective is required, ensuring long-term performance improvement improvement rather than focusing on a single transaction (such as a single transaction with customers or suppliers). Only then can companies compare past and future performance, and achieve sustainable value-added improvements. Source: Deloitte University, Deloitte Research

The analysis from the above three dimensions clearly demonstrates that the business value of IoT will increase efficiency, promote business growth and enhance risk management, explained in more detail in Figure 4 below.

Figure 4 Business avatar of the value of IoT

•• Increase asset usage and reduce downtime ••Ensure stability and accuracy of planning

•• Improve business agility and response to ••Improve legal compliance Efficiency changes improvement ••Streamline supply chain or reduce supply chain costs

•• Explore sources for core business growth •• Strengthen the customer integration and channels •• Increase sources of income in after-sales Business market •• Innovate new products and services growth •• Deepen understanding and insight about •• Create new business models customers

••Ensure product safety ••Effectively manage warranty and recall Business performance ••Improve asset security •• Enhance cyber security improvement ••Improve operational security Source: Deloitte Research

23 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Embodiment of the value of Manufacturing Industry shows that Industrial IoT applications in China 89% of the companies surveyed believe While China's manufacturers Industrial IoT is critical to business recognize the importance of success in the next five years. While 72% industrial IoT, they have not have started Industrial IoT applications established clear-cut IoT strategies. in one form or another, only 46% have The Deloitte Survey on the Industrial established clear-cut Industrial IoT IoT Applications in the Chinese strategies and plans. (Figure 5)

Figure 5 Awareness and applications of Industrial IoT in the surveyed companies

Industrial IoT is critical to the business success 89% % 6%

Have started to apply Industrial IoT to 72% 2% % some extent

Have a clear Industrial IoT strategy 6% % 10%

0% 20% 0% 60% 80% 100%

Agree Disagree No Idea

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

Figure 6 Companies surveyed use sensors to collect data

100% Use other tools to 80% collect data

No Plan 60%

Plan to start 0%

20% Already started collecting 0% Use sensors to Use sensors to collect product data collect equipment data

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

24 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Manufacturers are still in the In-depth Industrial IoT applications beginning phase of data applications require companies to change the way – the shift from interpretation to they use data—a transformation from prediction takes time. interpretation to prediction. After Most companies surveyed have begun using the data collected from a variety to use sensors to collect data from of sensors to interpret patterns of products and devices or are intending historical performance and the root to do so. More precisely, in terms of causes, companies need to adopt a product data, 45% of the companies forward-looking perspective: how can surveyed have already begun to collect the collected data be used to improve data and 31% intend to start the intermediate process and product collection. In terms of equipment data, sales? What sort of products and 53% of the companies have started to services may bring in new sources of collect data while 26% have made plans revenue in the future? And what kind for collection. (Figure 6) of IoT applications may open up new markets? However, these companies remain in the perception stage of data application, and have not reached the action phase yet (Figure 7).

Figure 7 How companies use the data collected (percentage represents the proportion of firms choosing this option)

Data visualization 65% Root causes analysis 57% Generate management reports and KPI dashboard 51% Develop forecasting models and 37% optimization models

Data mining to discover new insights 26%

Others 2%

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

25 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Key drivers - optimizing supply while others hope to improve chain for efficiency improvement, business agility and legal compliance enhancing customer experience (Figure 8). for revenue growth and improving product safety for better risk Real-time data of supply chains can management. help pinpoint problems even before Our findings show that the Industrial they occur. As a result, a company IoT applications of Chinese may reduce inventory and even manufacturers are mainly driven by capital requirements. Industrial efficiency improvement although IoT can help manufacturers better revenue growth and risk management understand this information. By promotion have started to attract connecting factories to suppliers, increased attention. all parties involved in the supply chain can track the interactions ••Efficiency Improvement among them, the material flow, and In terms of efficiency improvement, the manufacturing cycle. Systems optimizing supply chains through that support Industrial IoT enable Industrial IoT applications has location tracking, remote inventory received the most attention, with monitoring and access to reports of 116 out of the 156 companies parts and products moving in the surveyed (74%) desiring to improve supply chain. They can also collect the efficiency of their supply and provide delivery information to chains and reduce costs through enterprise resource planning (ERP), Industrial IoT applications. Some product lifecycle management (PLM) 110 companies (70%) desire to use and other systems. technologies such as predictive maintenance to improve operational efficiency and reduce downtime,

Figure 8 Key areas of efficiency improvement in the companies surveyed after the implementation of Industrial IoT applications (figures represent the number of firms choosing this option)

Supply chain optimization 116

Capital operation efficiency improvement 110

Business agility 92

Compliance 28

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

26 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

••Revenue growth Out of the 156 companies surveyed, When it comes to the value 113 (72%) desire to improve their proposition of IoT, industrial customer experience and generate companies focus not only on revenue through Industrial IoT efficiency improvement and applications, while 107 companies cost reduction but also on (69%) hope to develop new business growth. Through data products and services with the data analysis, including the previously generated by Industrial IoT and undeveloped data, translating the 95 companies (61%) want to use data into applicable market insights the IoT data to help them achieve helps companies to better serve innovation in their business models their customers, providing new (Figure 9). opportunities to improve customer loyalty and satisfaction.

Figure 9 How companies intend to increase revenue (figures represent the number of firms choosing this option)

Customer experience improvement 113

New products and services 107

New business models 95

New markets 91

Improvement in core business 73

Better pricing 50

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

27 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

••Enhance risk management In terms of product safety, Regarding the optimization of the companies have improved risk management, key areas the quality control by maintaining the companies surveyed focus on are traceability of digital thread of product safety (77%), asset security products from raw materials to (65%), operational security (65%), end products. Companies also use and effective management of artificial intelligence algorithms and warranty and recall (61%) (Figure 10). optimization programs to reduce rework and waste.

Figure 10 Risk management improvement enabled by the Industrial IoT is mainly reflected in four areas. (The number represents the number of companies choosing this option.)

Ensure product safety and quality 120

Improve assets security 101

Improve operational safety 100

Effectively manage warranty and recall 95

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

28 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

The focus of future Industrial promotion as well as business growth, IoT applications will shift from companies will shift their attention equipment and assets to products from equipment and assets to and customers. products and customers. Industrial companies equipped with IoT may generate business growth When asked in which areas more mainly in two ways: new products detailed and constructive data is and services and closer customer needed, 69% of the companies chose relationships. To develop more the product data while 61% selected attractive products or to enhance the customer data, surpassing the existing customer relationships, a operational data (53%), sales data significant amount of data concerning (53%) and asset and equipment data products and customers is needed. (42%). (Figure 11)

At present, there is much less Key challenges - lack of information on products and interoperability standards, data customers available compared with ownership and security as well as the data on assets and equipment. under-qualified operators (Figure Driven by the demand for efficiency 12).

Figure 11 Areas need more detailed and constructive data

Product 69%

Customer 61%

Operation 53%

Sale 53%

Asset and equipment 2%

Service 38%

Competitor 27%

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

29 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Figure 12 Biggest issues for companies in applying Industrial IoT technologies (percentage represents the number of firms choosing this option)

The lack of interoperability and 52% standards

Ownership and security of data 6%

Underqualified operators 2%

Data quality 38%

The lack of capability to carry out data 36% analysis and provide new insights

Coordination inside the company 26%

Cyber security 2%

Inadequate budget 17%

Source: 2016 Deloitte's Survey on the Industrial IoT Applications in Chinese Manufacturing Industry, Deloitte Research

••The lack of interoperability in manufacturing improvements. standards Regardless of the role they play—the For 52% of the companies surveyed, data owner or the data guardian— the lack of interoperability standards equipment suppliers can reap their is one of the major challenges in own profit from data generated by applying Industrial IoT technologies. the Industrial IoT only after they Related studies show that due to share the data with and provide the lack of interoperability 40% of valuable services to their customers. the potential value of Industrial IoT cannot be realized4. Security is another obstacle for Industrial IoT. The sustained surge ••Ownership and security of data in the number of connected devices A total of 46% of the companies has provided industrial systems surveyed believe ownership with unprecedented opportunities and security of data are major for growth and performance challenges in applying Industrial improvements. Nevertheless, this IoT applications. The market has growth also poses new risks for yet to agree on who owns the data, industrial companies, especially manufacturers or users of the considering the exponential risk equipment with which the data is of data breach. The security issue collected. Most equipment suppliers of Industrial IoT covers all aspects tend to provide customers with – from industrial processes and an effective access to raw data, applications to safety and reliability encouraging users to participate

30 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

requirements – and can therefore Unleashing the business value of not be addressed in isolation. Industrial IoT Industrial IoT will become a new ••Lack of relevant technical source of revenue and improve personnel efficiency and security, creating new Lack of qualified technical personnel value for businesses. To realize such is another major challenge for value, companies need to take the 42% of the companies surveyed. following strategies into consideration: Considering factors such as the big variety of Industrial IoT Aim high, start small, create value applications and circumstances, and accelerate upgrades new data sources, changes in Building an industrial IoT framework system architecture data as well largely depends on a clear-cut as multi-structured data, today's strategy, which defines scopes and manufacturing companies do not targets of IoT applications. A company have adequate analytical capabilities without a clear-cut strategy always and required talents. Although many leans on a single-issue technology to manufacturers do have sufficient solve diverse business problems while experience in data analysis, their a company with a clear-cut strategy experience, however, mainly focuses on the comprehensive concentrates on the descriptive application of multiple technologies to analysis based on the structural change the overall way it operates and data sets instead of the predictive does business. and pattern analysis using collected real-time big data in conjunction Industrial IoT has significant potential with a variety of unstructured data5. but applying it requires changes and adjustments in business culture, Although many universities are infrastructure, technical capability and trying to develop appropriate talents human resource. Thus, if companies in the field of data sciences, the attempt to solve problems in a number is still limited. Competition comprehensive manner, their growth for high-end talents will become might be stalled. more intense. Thus, companies should recognize that building Consequently, companies should partnerships with educational aim high but start small to create institutions is becoming increasingly value and upgrade fast. Only when important. a series of small tasks is completed, big changes can happen. Companies should first launch specific pilot projects that will support the long- term goals, and find the necessary technologies for future promotion and fast upgrades only during this process.

31 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

Focus on the product and Improve security customer lifecycles Many companies decided to establish The value of industrial IoT does not information security frameworks and only derive from management of mechanisms to minimize the risks. products and equipment but also Information security mechanisms from management of products and include information security targets customer lifecycles. (incidences, breaches, minimal value of production end time), security In order to extend these two lifecycles, measures (physical measure, network, identifying ways to convert a one-time host, data, personnel, emergency transaction into a sustainable income preparedness and document source is crucial. One way to achieve management measures) and security this is for example the Manufacturing- management systems (for data as-a-Service (MaaS), which is based on centers, networks and sensitive Pay per Use. But many other ways that devices and so on). ensure closer customer relationships and sustainable value creation and fee In addition to traditional information charges can be considered. security risks, cyber risk has become an increasingly sensitive issue of IoT. Develop the ability to apply big Companies can manage cyber risk by data applying the following measures: The implication of big data is not to ••Define interoperability standards: collect more data as such, but to be following a universal standard can able to accomplish in-depth analysis help ensure secured and effective to solve problems or to identify communication and collaboration predictive policy decisions. amongst devices.

When companies build big data ••Use special devices and components applications, they should start by instead of retrofitting the old designing a top-level framework systems: since old systems are not based on business strategies and IT designed to cope with IoT security strategies. This framework should problems, companies should use include the following elements: a) new security technologies instead, targets and strategies for big data specifically designed for IoT or applications, providing the roadmap components targeting cyber security for building applications and problems. platforms; b) circumstances where ••Clarify areas of responsibilities big data analysis and modeling are for participants of the ecosystem: used, providing clear configuration everyone in the IoT ecosystem of big data applications based on should understand where their value chain and customer lifecycle; responsibilities begin and end, c) big data analysis and modeling, evaluating the potential risk at every which provides direction for problem juncture. Knowing the origin of a solving through identifying challenges certain risk factor can help develop and applying multiple algorithms and more secured solutions. d) a big data technology platform, which provides the necessity to track development trends of technologies and utilize all kinds of application systems in the company.

32 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

••Develop data baseline: data baseline Of course, not every company can can help companies distinguish become an ecosystem builder and suspicious situations from normal promoter like GE, especially if there ones, enabling companies to react are already too many IoT platforms on when data goes out of the normal the market. The industry as a whole range. is expected to go through numerous integrations of IoT platforms while ••Enhance data governance: many existing ones will be eliminated.6 management systems on data Whether companies should position collection, usage and storage can themselves as builders of ecosystems, help avoid damage and prevent providers of modular products or negative influence from spreading. establishers of channels will depend ••Establish flexible coupling systems: on how their businesses are designed if coupling systems are loose and and how profound their knowledge of flexible, the breakdown of a single their end users is. system will not result in losses on a large scale. Technological advances have unlocked the potential of IoT solutions in Ensure proper positioning and industrial applications. Such solutions cooperation in the ecosystem. improve operation efficiency, increase The overall system of Industrial IoT sources of revenue and inspire cannot be established by one single innovation. IoT has proved to be able manufacturer. Rather, such system to help companies create more and needs to be developed within a sustainable value and to convert one- complete ecosystem. time transactions in the past to long- term customer relationships. Although GE Digital is now working with connectivity and security problems Dell, EMC, Microsoft, SAP, Nokia remain an issue, we still expect IoT and dozens of other companies to to sweep through many important develop an Industrial IoT platform, segments in the industrial sector. which allows these companies to develop new industrial applications and offer value-added applications to customers. And this is only one case among many others. Companies like Honeywell, Schneider, Cisco, IBM and Accenture are also in close cooperation, building an industrial IoT platform.

33 Growth dynamics for Asia in the trend of deglobalization | Unleashing the value of the Industrial Internet of Things

IoT has proved to be able to help companies create more and sustainable value and to convert one- time transactions in the past to long-term customer relationships.

34 Growth dynamics for Asia in the trend of deglobalization | Endnotes

Endnotes

1. "Study on IT hardware and equipment for IoT: Industrial IoT has a huge potential", 2015-7-30, http://pg.jrj.com.cn/acc/Res/CN_RES/ INDUS/2015/7/30/9ffde3f7-2e3e-4d12-bbcb-574acfafd389.pdf

2. 5 CIC, Report on the IoT Industry and Investment Prospects Forecast Based on the Data During the 13th Five-Year Plan

3. 6 The concept of "information value loop" came from Michael E. Raynor and Mark J. Cotteieer, "The more things change: Value creation, and the internet of Things" Deloitte Review 17, 2015-7-27, http://dupress.com/articles/value-creation-value-capture- internet-of-things

4. GS1 Global Barcode Organization, "Gaining Interoperability in the Digital Economy", 2015-7-17, http://www.gs1.org/docs/technical_ industries/ GS1_Technical_Industries.PDF

5. Zhang Lili, Jiudao Tech "The four major areas of Industrial IoT and big data analysis", https://kknews.cc/zh-sg/tech/ep93a4.html

6. Brian Buntz, " Drones, AR, and IoT Survival of the Fittest: 10 Tech Trends for 2017", 2016-12-8, Internet of Things Institute http://www. ioti.com

35 Voice of Asia | Things you need to know about Asia in 2017 Voiceof

EditionAsia 1

36 Voice of Asia A rich tapestry of insights

The Asian century is shaping, cultivating, and driving a dynamic future for business and society. Powered by almost 60 percent of the world’s population, the region has become a hub of diversity and innovation.

Our Voice of Asia series brings to life the challenges and opportunities facing the region today and tomorrow. The potential has never been greater to create a cohesive narrative that reflects the interdependence of the region and provides a glimpse of what’s possible across Asia, shaping a more positive outlook overall. In this edition, we focus on key unifying themes—from growth to trade, culture to commerce—that underpin Asia’s current and future prosperity.

This is our voice, the Voice of Asia.

37 Voice of Asia | Things you need to know about Asia in 2017

Things you need to know about Asia in 2017

It’s easy to be gloomy. Global growth has disappointed for some time, and in recent years Asia has started to be part of that problem. The last decade has served up a seemingly never-ending succession of shocks, both political and economic.

So we’ve got some positive news for you: much of the news in 2017 is more likely to be good than bad, with Asia set to be central to better-than-expected global growth this year.

38 Voice of Asia | Things you need to know about Asia in 2017

But not all the news is good, so here are Insight No. 1: Global growth will our key “need to know” insights for Asia accelerate faster than expected, this year: with Asia a big winner Many forecasters, including the •• First, global growth will surprise International Monetary Fund (IMF) on the upside, with Asia—led by and the World Bank, are warning that India—to be a substantial winner global growth will moderate, with risks from that. Leading indicators of tilted to the downside. global growth are on the rise as the big shocks of recent years settle into the In our opinion, this is overly rearview mirror, with that good news pessimistic. We see evidence that already bubbling up into a lift in export global growth will accelerate, not orders in Asia. decelerate. Leading indicators show •• Second, while growth may be this and the underlying drivers of the a pleasant surprise, financial global economy, such as labor and stresses are a major risk factor. credit markets, already turning more Global interest rates are finally positive. beginning their long climb back to normal, with the US Fed leading the And why wouldn’t they? Consider: way. That will generate a lot of volatility ••The G3 economies (the United in markets, but our analysis suggests States, Europe, and Japan) are all Asia is better placed than most to maintaining or increasing their rates handle that stress. of recovery. •• Third, the best news within ••India continues to surprise by overall global growth will shift maintaining growth above 7 percent back in favour of emerging in the face of global headwinds. economies. Even better, this won’t be “lazy” commodity-driven growth. ••China is stabilizing thanks to Reforms have boosted the underlying aggressive policy action to offset competitiveness of many emerging that nation’s headwinds. economies, setting the stage for more broad-based.

39 Voice of Asia | Things you need to know about Asia in 2017

Much of the news in ••Large emerging economies such as ••First, new export orders have Indonesia are poised to accelerate, been rising steadily—a message 2017 is more likely to while others such as Russia and that can be clearly seen in purchasing Brazil are set to recover. manager surveys around the world be good than bad, (chart 3). This burgeoning export ••The net benefit of low oil prices is recovery is supported by a rise likely to be more evident in 2017. with Asia set to be in new export orders received by Positives such as higher consumer all sectors of the global economy, central to better- spending and the expansion of as chart 4 reveals. Moreover, energy-intensive activities will begin export orders received by Taiwan, than-expected global to dominate over negatives such a bellwether for world trade, are as collapsing oil-related capital looking healthy, while factory orders growth this year. spending. in Germany, another major global exporter, are also on the up. Those are powerful positives. ••Second, trade in electronics World trade is rebounding: components is another key lead the early evidence indicator of world trade. With As chart 1 shows, world trade new US orders for computer and volumes have been in the doldrums electronic parts rising (see chart 5), for many years. this too points to growth in Asia’s manufactured exports. However, as chart 2 highlights, there ••Third, container throughput, yet are very early signs that US import another leading indicator, is also demand is picking up. recovering (chart 6).

And the leading indicators of world ••Finally, air freight, which also trade show that a gathering rebound provides a gauge of future trade is under way: activity, is showing signs of life too. In fact, the growth of global air freight has accelerated to its strongest rate since early 2015.

40 Voice of Asia | Things you need to know about Asia in 2017

a o ae a io oes oe o A io oes iciie ecoe o io oe o oo % y/y % y/y 30 20 20 15 10 10 5 0 0 -5 -10 -10 -20 -15 -20 -30 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 1 Jan 15 Jan 16 Mar 01 Mar 02 Mar 03 Mar 0 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 1 Mar 15 Mar 16

Source: Calculated using data from CPB world trade monitor Source: Calculated using data from CPB world trade monitor eoie iesi ess esseoieco eoie iesi ess esseoieco

a oa afaci a oa a is e eos ie e siess ie e eo oes …reflecting a general recovery in orders

(%) (%) 5 65

52 55 50 5 8

6 35 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 1 Jan 15 Jan 16 Feb 15 Feb 16 Aug 1 Aug 15 Aug 16 Nov 1 Nov 15 May 1 May 15 May 16

Source: Calculated using data from CEIC database Source: Calculated using data from CEIC database eoie iesi ess esseoieco eoie iesi ess esseoieco

a e oes a oaie oe o A coe eecoic ocs coaie oes ecoei ecoics ae ei a a % y/y (%) 20 20 15 10 10 0 5

-10 3MMA 0

-20 -5 Jul 11 Jul 10 Jul 12 Jul 13 Jul 1 Jul 15 Jul 16 Jan 11 Jan 10 Jan 12 Jan 13 Jan 1 Jan 15 Jan 16 Jul 10 Jul 11 Jul 12 Jul 13 Jul 1 Jul 15 Jan 10 Jan 11 Jan 12 Jan 16 Jan 13 Jan 1 Jan 15

Source: Calculated using data from CEIC database and Source: Calculated using data from CEIC database and RWI-Leibniz-Institut fr Wirtschaftsforschung (RWI) and RWI-Leibniz-Institut fr Wirtschaftsforschung (RWI) and the Institute of Shipping Economics and Logistics (ISL) the Institute of Shipping Economics and Logistics (ISL)

41 Voice of Asia | Things you need to know about Asia in 2017

Trade rebound underpinned by Other large emerging economies momentum in G3, India, and China are bouncing back And there’s more good news where But wait, there’s more. The that came from: Organization for Economic Co- operation and Development (OECD) ••The United States is recovering lead indicators for Russia and Brazil its role as an engine of global suggest above trend growth likely over growth, with both manufacturing the next 12 months: and services more robust. The US economy is growing at its fastest ••Russia’s manufacturing rate in more than a year, and the purchasing managers’ index is IMF is forecasting that growth to rise close to a two-year high. Production further in 2017. is growing at its most robust pace in two years, and rising new orders ••The Eurozone is weathering portend continued growth. its challenges: the Eurozone has shaken off the shock of the Brexit ••Brazil’s current indicators vote and continuing political and remain dismal, but forward- financial uncertainty. looking ones are improving: the central bank is cutting rates, while ••India’s services exports are likely lower oil prices, greater confidence to benefit from the recovery in in policy reforms, and an improving US growth momentum as the world economy are helping the United States continues to be the Brazilian economy to bottom out. biggest market for Indian services.

••China’s stimulus is set to The world economy is normalizing continue: China has been on a after successive shocks firmer footing of late as it returns This set of good news in many ways to debt-fuelled growth facilitated has a single source—a lack of new by cheap credit. It is concerning crises. that the underlying structural weaknesses and risks that gave The world economy is finally coming rise to the crisis of confidence in out of a dark period of successive China a year ago remain unresolved. major shocks. They began with the However, we also believe that public global financial crisis of 2008–09, sector largesse can keep China’s but that was then followed by the economy on a decent growth Eurozone sovereign debt crisis from trajectory through 2017. 2011, the sharp slowdown in Chinese economic growth and the subsequent collapse in commodity prices from 2014, and the ragged performance of large economies following that.

42 Voice of Asia | Things you need to know about Asia in 2017

The election of Donald Trump as What we are likely to overwhelmingly President of the United States see through 2017 is the natural raises some important questions healing process that occurs in for the global economy in 2017, economies as the worst effects of including in relation to trade. Many these shocks wear off. This is forming of those questions are being asked a base for a more resilient recovery elsewhere as well, as nationalist and around the world. protectionist sentiment proliferates across many developed economies. The world economy However, the outcome may be far is finally coming out less dire than is being feared. As President Trump has toned down of a dark period of some of his initial campaign rhetoric; more important, there are limits successive major to his influence when swimming against a rising tide of prosperity shocks. and globalization, both of which will continue to provide an important stimulus for trade into the future.

43 Voice of Asia | Things you need to know about Asia in 2017

The missing ingredient has been We see the relative winners among capital spending Asian economies as those with An acceleration in capital spending competitive manufacturing sectors: in the United States would be big ••Export-oriented newly news. Pressed by the need to improve industrialized economies profitability, and as the recovering US will be the biggest winners: economy provides more confidence Taiwan should benefit given its that domestic risks and external strong linkages to US technology risks such as Brexit and a Chinese products—but the strength of its slowdown can be contained, capital recovery will also depend on how spending—the missing ingredient in a much of a turnaround there is in US recovery—could well revive. Chinese demand for Taiwan-made intermediate products. Singapore The multiplier effect could be will be a major beneficiary too, given significant in Asia, including in India how trade-dependent that economy via increased trade in services. Large is. South Korea will benefit too, US financial institutions are the major particularly if there is a rebound consumers of Indian information in global capital spending—but technology services, and any genuine the rebound will be constrained revival in the United States will lead by sector-specific challenges in its to better opportunities for service shipbuilding, shipping and phone providers. sectors.

Of course, this is no sure thing. ••Export-oriented ASEAN American firms still face excess economies stand to gain as capacity and a rising US dollar, well: Malaysia has a competitive which hurts US exports. If business currency and a strong base of investment does take off, it will be export-oriented manufacturing, and because businesses are confident trade is a big share of the Malaysian of a boost to demand and an uptick economy—one of the world’s in inflation—both of which could be highest such ratios. Thailand, too, spurred by the sort of fiscal stimulus will be a winner, as will Vietnam, that President Trump has suggested although the Philippines and he might champion. Indonesia are less competitive in export-oriented manufacturing. Asian exporters the big winners from global recovery The sub-index for new export orders in purchasing manager indices across Asia are already on the rebound. That’s an encouraging sign, indicating that global demand is slowly but surely gaining strength.

44 Voice of Asia | Things you need to know about Asia in 2017

••Outsourcing will continue to Insight No.2: The Fed to raise rates gain: we also see outsourcing, faster than expected, but Asia can which has been a major engine of handle it growth for India and the Philippines, It is clear that the US Federal Reserve strengthening despite the US is shifting away from its extreme election-related rhetoric around reluctance to normalize interest rates, this topic. India’s outsourcing raising the question of whether the industry remains dominant in the gradient of the rate hike trajectory region, and has morphed into a will be steeper than expected. Some broader ecosystem integrating voice officials are now talking about the support along with sales support risks of not tightening early enough, and software development. Given while the data is pointing to renewed the advances in the technological vigor in the US economy: domain and the need to maintain ••There is now a risk that the United profitability, the outsourcing States could actually grow too fast industry is likely to continue showing and cause some asset markets to impressive growth for both India “become too ebullient”.1 and the Philippines. ••Also, inflation is showing signs of ••China is an obvious beneficiary from picking up and is heading toward the increased demand in the G3, but it 2 percent target. is facing more protectionist barriers and some Trump-related question ••The surge in Purchasing Managers’ marks; India’s manufacturers Index activity indicators; the remain less geared to a pickup in continued, albeit modest, firming G3 demand but nonetheless will be of the labor market; and the signs positively affected by a recovery in that capital spending—the missing key export markets. Further, India’s ingredient in the US recovery—may manufacturers have considerable be reviving, suggest the economy potential to sell into newer markets is in robust shape. If so, that and are already targeting African makes continued ultra-low rates and Latin American countries. inappropriate. ••And if capital spending really accelerates, as we believe it will, the multiplier effects on the economy will be sizable.

45 Voice of Asia | Things you need to know about Asia in 2017

What would higher interest rates Susceptibility to rising interest mean for Asian markets? rates: after a long period of very If the US Federal Reserve does lob low interest rates, debt levels have grenades at global growth in 2017, are expanded among families and the nations of Asia well prepared? businesses in Asia. Rising rates could hurt those who are over-leveraged. There are several important factors We need to look beyond just debt that will determine Asian economies’ levels to assess the degree of risk resilience in the wake of a Fed rate here. If banks are well capitalized hike. and there are few distortions in the economy such as asset bubbles, then Exposure to abrupt withdrawals the risk is lessened. of external capital: risky assets such as emerging Asian stock markets and Apart from China and Hong Kong, bonds will be re-priced if US interest we see little risk of this. The Indian rates rise and investors become more economy has undergone some major rigorous in assessing risks. changes over the last three years due to active policy action around There are three ways to measure the managing this risk. However, financial degree of risk: markets still remain susceptible to 1. Countries with current account a rise in US policy rates. The recent deficits are better off if the deficit is Fed hike is likely to mean capital mostly funded by direct investment moving toward the US markets as rather than volatile portfolio capital. investors realign their portfolios. This Given that, Indonesia remains has historically meant a weakening vulnerable. of currency and volatility in portfolio 2. Another measure is the share of flows into India. a country’s easily sold securities owned by foreigners. That’s an The bottom line: resilience in the indicator on which Indonesia and region has improved as countries Malaysia seem modestly vulnerable. have strengthened their economic 3. A final yardstick is the extent to fundamentals to reduce their which short-term debt is covered susceptibility to global financial by foreign reserves. At first glance volatility. However, with the global Hong Kong and Singapore look economy more interconnected than vulnerable on this score, but that’s ever before, no economy is completely only because their large banking insulated, and some are more sectors exaggerate this ratio. Only vulnerable than others. Malaysia is moderately at risk here. So although we think that much of Asia will be able to handle the impact of rising US interest rates, it will remain crucial for Asian economies to further improve their resilience.

46 Voice of Asia | Things you need to know about Asia in 2017

As the years of “lazy” Insight No.3: A more competitive ••Accelerated reforms: these Asia roars back with higher- efforts are being complemented by commodity-driven quality growth necessary reforms to address the Over the past few years, a bunch of deep-seated structural weaknesses growth recede, factors led to emerging economies that have held back economic underperforming. That list includes competitiveness and growth across governments are political convulsions, unpredictable Asia in recent years. being forced to weather, a weak global economy, falling commodity prices and the That’s a good news story. Yes, Asia’s undertake reforms short-term ill effects of reforms such growth has faced challenges, but a as subsidy cuts and tax reforms. variety of responses look set to make that improve long-term a helpful contribution to the region’s However, with some of this bad news growth in 2017. fundamentals—and now dissipating, the large emerging economies are poised to lead global Taking stock of relative the payoff looks to be growth into the next decade—all the competitiveness just around the corner. more so because the quality of their Global institutions frequently compare growth is improving. A number of countries across a range of indicators factors are driving this: in order to gauge their relative competitiveness and performance ••Lazy commodity-driven growth over time. is being reversed: low commodity prices have weighed on the trade Across most competitiveness indices and revenue positions of several (see table 1), we see a recurring trend emerging economies—a problem among Asian economies: for Indonesia in particular. However, we believe that the damage from ••Singapore leads its peers almost the commodity boom reversal across the board. has been done and commodity- ••Malaysia and China fall in the middle. related activity is beginning to see a recovery that could well extend into ••They are trailed by India, Indonesia, 2017. Second and more importantly, the Philippines, and Vietnam. instead of reverting back to commodity dependence, nations However, an assessment of are reinvigorating reform efforts to competitiveness over time suggests diversify their respective economies. these trailing economies are on a rising curve thanks to the factors ••Strong policy action: we are seeing mentioned above. We can see this stronger policy responses across partly by comparing their ranking in the region as well, helping to boost the World Economic Forum’s Global economic growth. Government Competitiveness Index, which gauges policies and spending are boosting competitiveness by assessing a wide private-sector confidence and are range of key aspects that matter helping to generate a recovery for competitiveness. That index in investment spending. That will measures competitiveness based on create new capacity and further criteria ranging from institutions and improve competitiveness. the macroeconomic environment to innovation and business sophistication.

47 Voice of Asia | Things you need to know about Asia in 2017

Table 1: Regional competitiveness comparisons

Ranking Global World AT Kearney WB Logistic WEF Travel Competitiveness Competitiveness FDI Confidence Performance and Tourism Index (WEF) Index (IMD) Index Index (2016) Competitiveness (2016-17) (2016) Index (2015)

Indonesia 41 48 N.A. 63 50 China 28 25 2 27 17 India 39 41 9 35 52 Malaysia 25 19 N.A. 32 25 Philippines 57 42 N.A. 71 74 Singapore 2 4 10 5 11 Thailand 34 28 N.A. 45 35 Vietnam 60 N.A. N.A. 64 75 Australia 22 17 7 19 7 New Zealand 13 16 N.A. 37 16 Japan 8 26 6 12 9 Korea 26 29 17 24 29

Source: Collated from various sources

Table 2: Global competitiveness index rankings (total of 138 countries)

Countries 2006–07 2011–12 2015–16 2016–17 Change to 2016–17

Singapore 5 2 2 2 0 Japan 7 9 6 8 -2 Korea 24 24 26 26 0 India 43 56 55 39 16 China 54 26 28 28 0 Australia 19 20 21 22 -1 New Zealand 23 25 16 13 3 Hong Kong 11 11 7 9 -2 Taiwan 13 13 15 14 1 Indonesia 50 46 37 41 -4 Malaysia 26 21 18 25 -7 Philippines 71 75 47 57 -10 Thailand 35 39 32 34 -2 Vietnam 77 65 56 60 -4

Source: World Economic Forum Global competitiveness Index rankings 2016–17

48 Voice of Asia | Things you need to know about Asia in 2017

India makes the largest gains: New Zealand has improved India was one of the region’s only quickly, while Australia loses two countries that showed an ground: Australia’s ranking improvement in the World Economic in the World Economic Forum Forum’s competitiveness index in competitiveness index slipped back 2016. It rose 16 positions, moving up in 2016–17 to tie its previous worst to rank 39th out of 138 countries. position of 22nd out of 138 countries. The improved performance Key drivers of the result were was underscored by progress innovation, where Australia continues across all sub-components of the to slip behind developed economy competitiveness index, notably peers on the World Economic Forum so in market efficiency, business measure, and a relatively high sophistication, and innovation. The corporate tax rate. In contrast, New cumulative reform efforts of the Modi Zealand has rocketed up the rankings administration are clearly easing in recent years, reaching 13th place the constraints to doing business in 2016–17. That compares to the in India. The last year in particular country’s 25th ranking just five years has seen some key legislations pass, ago. Although New Zealand also ranks the implementation of which will behind other developed economies in likely have a noticeable effect on terms of innovation, the country was competitiveness in the coming years. ranked first in 2016–17 for financial In May 2016, the government passed market development, time taken to the “Insolvency and Bankruptcy Code start a business, efficacy of corporate 2016,” which will enable insolvency to boards, and the strength of investor be settled on a timely basis, create a protection. record of serial defaulters, and allow faster turnaround for businesses Indonesia is improving but in India. Another key reform has remains an economy of contrasts: been the passage of the “Goods and Indonesia fell five positions in Services Tax Bill August 2016,” aimed 2016, ranking 41st overall. The at converting India into a unified macroeconomic environment, market with four indirect tax rates financial market development, and across all states. This is expected to innovation have improved markedly, be the biggest game changer in India’s but Indonesia is still languishing tax regime in recent times and is likely in health and basic education, as to result in increased competitiveness well as labor market efficiency and for Indian producers. technological readiness. However, prospects are better than ever. The Jokowi government has already launched 13 economic policy packages to improve Indonesia’s business environment. When coupled with both the government’s plans to continue improvements in health and education and the increased technology uptake across firms, the new policies will be amplified and translate to higher growth.

49 Voice of Asia | Things you need to know about Asia in 2017

The Philippines fell in the rankings Financial markets have gotten over for the first time in a decade: with their shock at China’s sudden move bureaucratic red tape, corruption, to weaken its yuan in mid-2015. The and infrastructure bottlenecks Chinese authorities have pursued a hampering competitiveness, the strategy of a steady but unpredictable Philippines slipped 10 places in 2016 pace of depreciation that currency to rank 57th, the first time in a decade markets have taken in their stride. that the nation has fallen in these rankings. Other weaknesses identified The Chinese economy is back on a included the country’s low goods relatively stable footing and probably market efficiency, poor technological hit its 6.5–7 percent target range readiness, and inadequate for growth in 2016. The recent infrastructure. Still, with a robust shocks of the stock market rout, the macroeconomic environment and a yuan’s sudden devaluation, and the competent economic team focused on subsequent flight of capital in 2015 improving these fundamentals, we are now seem to be behind us. According likely to see improvements in areas to the official data, the economy has such as infrastructure and eased been growing at a steady annual rate investment restrictions. of 6.7 percent (see chart 7).

Vietnam displays short-term But China has paid a price for this weakness: Vietnam fell four spots nascent stabilization. It has come in 2016 to rank 60th, following on the back of aggressive fiscal and a climb up the competitiveness monetary stimulus directed by the ladder since 2012. Vietnam reported central government, channeled poorer performance in the criteria through local governments and state- of macroeconomic environment owned enterprises and bankrolled and labor market efficiency, but the by large, government-linked financial long-term outlook is positive. Better institutions. Desiring a cyclical boost infrastructure and education limited to put the economy on firmer ground, the rank slippage. Also, Vietnam policymakers have turned back to is growing into a manufacturing debt-fuelled growth, facilitated by powerhouse, supported by surging monetary easing measures by the foreign direct investment. People’s Bank of China.

The bottom line: as the years of “lazy” commodity-driven growth recede, governments are being forced to undertake reforms that improve long-term fundamentals—and the payoff looks to be just around the corner. With competitiveness already improving, these reforms will produce a surge in Asian competitiveness in coming years that will further boost the region’s growth prospects.

50 Voice of Asia | Things you need to know about Asia in 2017

a ia ea o Chart 8. China: fixed assets investment, ytd ecii o o sae esise eceeaio i iese

% y/y % y/y 15 0

30 10

20

5 10

0 0 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 1 Jan 15 Jan 16 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 1 Mar 15 Mar 16

Source: Calculated using data from CEIC database Source: Calculated using data from CEIC database eoie iesi ess esseoieco eoie iesi ess esseoieco

As a result, China’s ratio of total debt ••Distortions also have built up in to GDP has soared, jumping from the financial sphere. For example, around 200 percent in 2010 to just the P2P sector has grown wildly, under 300 percent in 2015, with much with P2P loans surging more than of the new leverage extended to 150 percent in the past year—but the corporate sector. In a monetary with more than a third of them system with a weak credit culture, this experiencing operational problems. is risky. ••The liabilities of well over 100,000 companies owned by local Consider the following: governments across the country ••Much of China’s debt was extended grew at an average annual rate of 14 to state enterprises which used it percent from 2012 to 2015, to reach to fund more excess capacity. But USD 5.3 trillion. as excess capacity built up, pricing ••Moody’s has warned that small and power fell, and as a result, so did medium-sized banks are increasingly profit margins and cash flows. relying unhealthily on wholesale Unsurprisingly, there is growing funds, which reportedly now evidence of financial stress. account for a third of their financing.

51 Voice of Asia | Things you need to know about Asia in 2017

Reaching the limits of the current employing a variety of ways to move policy mix cash out of the country. One popular Other challenges limit the effectiveness way is through over-invoicing by of China’s traditional mix of fiscal and Chinese companies for imports from monetary tools: Hong Kong. Another way is via the purchase of life insurance products ••The economic revival has been in Hong Kong. Mainland Chinese overly dependent on the buoyant circumvent capital controls by paying property market, particularly in for expensive insurance products first-tier and popular second-tier and then cashing out of these policies cities where prices have skyrocketed soon after in Hong Kong. unsustainably. The likes of Beijing and Shenzhen saw their prices lurch The underlying weaknesses in the upward in 2016. This is being fueled Chinese economy mean that capital by rampant credit growth that the outflows will likely continue; this may, in government is now trying to rein in, turn, put downward pressures on the fearing the potentially destabilizing yuan. consequences of a housing bubble.

••And there’s a growing problem: Fiscal policy will likely be stepped up to credit-based stimulus is increasingly ensure that China does not fall off its less effective in boosting growth. This growth trajectory; more government means that there has been little real spending on infrastructure and social economic growth to show for all the welfare will likely be announced in the liquidity that has been unleashed; near future. this liquidity has increasingly been funneled into speculative areas, However, given the headwinds facing creating distortionary bubbles. private investment (which makes up ••In addition, the necessary almost a third of the economy), this deceleration of fixed asset investment alone may not be enough. Policymakers will weigh on growth prospects, given will likely recognize that stimulating that investment constitutes about 50 domestic demand comes with a heavy percent of the economy. The extra price and feel the need for stronger leverage that policymakers have exports to drive economic growth. unleashed has simply added even more capacity to an economy already saddled with chronic industrial overcapacity, which will deter private investment.

••Capital flight from China has ebbed somewhat but continues in various forms, through alternative avenues, reflecting still-sharp concerns about downside credit and growth risks. Businesses and individuals are

52 Voice of Asia | Things you need to know about Asia in 2017

At some point, a currency depreciation In the long run, most Asian economies may be considered necessary; the will benefit from China’s successful key question is the magnitude of that rebalancing of its economy. depreciation. Let’s finish where we started A larger-than-expected depreciation There has been plenty of doom and of, say, 10 percent—which cannot be gloom. The political and economic ruled out—would have a disruptive shocks of the last decade have, no impact on the region. It would certainly question, contributed to slower growth cause Asian currencies to depreciate and undercut confidence. across the board, with manufactured- goods exporters such as Korea, But the doom and gloom is overdone. Taiwan, and Malaysia most affected. Much of the news in 2017 is more Such a policy response is perhaps likely to be good than bad, and Asia is warranted by China, given its challenges well placed to play an important role of reflating the economy and cutting in driving better-than-expected global spare capacity, and might trigger a growth this year. competitive devaluation by Japan.

Such competitive devaluations could drive the dollar to a level detached from underlying fundamentals, resulting in delays of necessary rate hikes. Indeed, the US dollar is already experiencing considerable upward pressure and could appreciate further if fiscal and monetary policies evolve in line with market expectations. An elevated dollar would mean a cheaper yen (a good thing for Japanese exports), further downward pressure on the yuan, weaker US exports, higher inflationary pressures in Asia, and difficulties for Asian companies with large US dollar- denominated debts. Such a scenario would present problems for many Asian economies yet also provide some opportunities.

1. Adam Samson, “Fed’s Rosengren sees ‘reasonable case’ for rate rise,” Financial Times, September 9, 2016 www.ft.com/content/d04a6c2d-d88d-30dd-8b82-84ce95abc38d 53 Voice of Asia | Things you need to know about Asia in 2017

Much of the news in 2017 is more likely to be good than bad, with Asia set to be central to better-than-expected global growth this year.

54 Voice of Asia | Trade to Trump protectionists and boost global growth

Trade to Trump protectionists and boost global growth

55 Voice of Asia | Trade to Trump protectionists and boost global growth

Trade has been part of the engine 1. Trade’s troubles were mostly driving the emergence of Asia on the temporary anyway, damaged by world stage. But it has been laboring successive crises and shocks, the for the better part of a decade. And effects of which are finally wearing although trade’s troubles are global, off. they’ve been biting deepest here in 2. More importantly, a bunch of Asia, where trade flows stalled a few those troubles aren’t really years back. trade-related anyway. The big fall in commodity prices in recent To date, most of those challenges years—cheaper oil, gas, iron ore, have been economic. But the political and coal—undercut measures challenges to trade are also mounting of the monetary value of trade. fast, with Trump’s anti-free trade But commodity prices have since agenda joining the Brexit revolution surged, and that artificial negative is and question marks mounting in disappearing fast. Europe, where the European Union 3. India’s services export story faces a gauntlet of elections. is still intact despite a marginal slowdown and political posturing So will trade flows continue to lose from the United States. steam, and drag down Asia’s 2017 4. China’s economy is lifting—indeed, prospects with it? The answer is no. that’s why commodity prices have In fact, Deloitte sees trade about surged. And China’s recovery to regain momentum for several suggests that trade’s recovery reasons: will follow suit in 2017.

56 Voice of Asia | Trade to Trump protectionists and boost global growth

And there are some trends that will There are no guarantees, of course. The rapid pace of growth in global favour trade into the future: However, President Trump’s influence trade has arguably been more 1. Policies have swung toward on global trade volumes over the next important for Asia than any other openness in the mega- few years may be smaller than many region. The transformation in Asia economies of the future. Looking imagine, while the powerful forces since the Second World War has been longer-term, Asia’s potential within Asia and elsewhere point to remarkable, starting with Japan and will increasingly swing toward trade strengthening over time. followed in quick succession by the economies such as Indonesia, “tiger” economies of Singapore, Hong Vietnam, and the Philippines. Trade matters—a lot Kong, South Korea and Taiwan, then Although these economies have Trade is the lifeblood of the global China, and now other Southeast Asian low trade multipliers, the sheer economy. It is a barometer of economies such as Malaysia, Thailand, pace of growth in the years to come economic health, an enabler of Vietnam, and Indonesia. will see their rise as part of the economic development, a facilitator of global trade story. technology transfer, and a mechanism The common thread through these 2. Just as the establishment of for productivity improvements and phases of economic development the European Union led to a income growth. in Asia has, in general, been a large increase in trade within reorientation of each economy toward Europe, closer integration and It is also a sprinter. 2017 marks exactly an outward, export-focused strategy. connectivity within Asian 200 years since David Ricardo proved As chart 1 shows, Asia now accounts economies will be a dominant that there are great gains to be had for around one-third of global trade. influence on trade volumes over from trade, and that is exactly what the coming decade. has happened since. Global trade has The fact that global trade growth 3. Finally, services are the new grown half again as fast as the global has outpaced global economic black. The global momentum economy over the past 50 years, growth at a time when Asia has been in trade is swinging away from doing better still—at twice the rate going through a profound economic goods—where the populism of of economic growth—over the two transformation has been hugely protectionists can do the most decades from 1987 to 2007.1 beneficial. It has allowed per capita damage—toward services. Faster income growth in Asia to accelerate recovery in the United States faster than it otherwise would have, and Europe can lead to greater contributing to lifting millions of services trade benefiting the Asian people into the middle class. economy.

a eioa saes of oa ecaise eos

Share of global merchandise exports (%) 50

0 Europe Asia 30

20

North America

10 Middle East South & Central America Africa 0% 198 1953 1963 1973 1983 1993 2003 2015

Source: World Trade Organisation eoie iesi ess esseoieco

57 Voice of Asia | Trade to Trump protectionists and boost global growth

Why global trade has slumped . . . growth has moderated alongside soft This is the first time in Since the global financial crisis, global economic growth. however, global trade growth has decades that global slumped. The financial crisis in 2008 More concerning still is the was a massive shock for the world deceleration in global trade growth trade growth has economy and severed many of the relative to global growth. After all, it traditional economic relationships was the sustained outperformance been less than global and linkages; global trade volumes of trade growth compared to global economic growth for plummeted in 2008 and 2009 (as seen growth over the previous half-century in chart 2). that so meaningfully supported a sustained period, development in Asia. While trade flows have resumed a and that is having positive trajectory, their growth has International Monetary Fund data been strangely subdued. The latest covering the last five years shows that significant implications data suggests that global trade the global trade elasticity—the ratio growth will slow in 2016, with the of trade growth to economic growth— for the global World Trade Organisation estimating has been approximately equal to 1. economy. growth on the order of 1.7 percent, Looking at just the last three years, the slowest pace since the global the elasticity has been less than 1. financial crisis. This is the first time in decades that That’s not necessarily surprising. global trade growth has been less Indeed, it makes sense that trade than global economic growth for a sustained period, and that is having significant implications for the global economy.

a oa ae

nde 700 Trend

600 Global 500 trade volumes 00

300

200

100

0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: World Bank; Deloitte calculations Note: Global trade measured in terms of total imports, real terms. eoie iesi ess esseoieco

58 Voice of Asia | Trade to Trump protectionists and boost global growth

. . . with Asia taking a major hit Part of the trade slowdown is Just as the rapid expansion of trade structural over time was of huge benefit to Asia, Over recent decades, emerging the relatively slow growth in global economies, particularly those in Asia, trade since the financial crisis has hit have contributed a rising share of the region hard. Chart 3 below shows global growth. Chart 4 shows that, how the trade intensity of different in the early 1980s, emerging market regions (measured by trade as a share economies contributed around one- of an economy, or the trade-to-GDP third of global growth. ratio) has changed since the onset of the global financial crisis. As a In the last five years, the contribution measure of this change, the chart from emerging economies has simply shows the trade to GDP ratio in increased to around three-quarters 2015 compared to the ratio in 2007. of global growth and is expected to remain at about that level over the medium term.

a ae i ae o aio

(%) 110 100 Global Average 90 Trade share 80 of GDP, 2015 70 relative to 2007 60 Sub-Saharan East Asia Middle East North America Latin America South Asia Europe & Africa & Pacific & North Africa & Caribbean Central Asia

Source: World Bank; Deloitte calculations Note: Includes merchandise trade only. Does not include trade in services. eoie iesi ess esseoieco

a oiio o oa ecooic o aace a eei ecooies

(%) 1 Forecast

12

10

8 Global economic 6 growth Advanced economy contribution

2 Emerging economy 0 contribution

-2 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021

Source: International Monetary Fund; Deloitte calculations eoie iesi ess esseoieco

59 Voice of Asia | Trade to Trump protectionists and boost global growth

Emerging economies have much Similarly, the opening up of China 1994, providing the free movement of lower trade elasticity than do the to global trade, while officially goods, services, and capital, as well as advanced economies. Chart 5 shows beginning in the previous decade, people, within the European Union. the persistently lower trade elasticity took hold during the 1990s in terms The North American Free Trade in emerging economies since the early of a big leap in trade between China Agreement between Canada, Mexico, 1980s. As the emerging economies’ and other countries (both within and the United States took effect share of global activity and trade has Asia and beyond). In addition, from 1994, while the Uruguay Round risen, the global elasticity of trade has with advancements in technology, of multilateral trade negotiations— fallen. networking, and connectivity, the which established the World Trade outsourcing industry centered in Organisation—were concluded in the Economies, firms, and policymakers India started to flourish. India’s trade same year. in Asia should be preparing for a with the United States and Europe in structurally lower trade elasticity into particular expanded rapidly during The 1990s was also a period when the future. this period. The fragmentation a number of countries within Asia, of global supply chains, driven by and some outside Asia, sought to Moreover, the 1990s also stand out widespread falls in information open up their economies, including in chart 5 as being very unusual. and transport costs, also helped to putting in place incentives for exports. The fall of the Berlin Wall and the contribute to a structural shift in trade This widening of the “Asian model” corresponding raising of the Iron volumes. of economic growth—which had Curtain, along with the fragmentation previously become synonymous of the former Soviet Union, combined At the same time, trade liberalization with the economic performance of to increase international trade both lowered barriers to international the Asian tiger economies during with and within Eastern Europe over trade. Within Asia, the ASEAN Free the 1960s and ’70s—deeper into the subsequent years. Trade Area agreement was signed Southeast Asia helped to underpin in 1992. In Europe, the European rapid export growth in that region in Economic Area was established in particular.

a ae easici

3.5

3.0

2.5 Period average: 2.18

2.0 Advanced economies 1.5

Period average: Emerging and 1.0 1.38 developing economies 0.5

0.0

-0.5 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15

Source: International Monetary Fund; Deloitte calculations Note: Trade elasticity calculated as the ratio of real import growth to real economic growth.

60 Voice of Asia | Trade to Trump protectionists and boost global growth

Trump is only the most All of that suggests that global This sentiment is undercutting efforts trade elasticity in the 1990s was to pursue more liberal trade policies prominent example of unsustainably high. around the world. Indeed, it threatens to reverse past gains. An example a new global wave of And now there are strengthening is Trump’s commitment (on “day political currents running against one”) to withdraw US support for the nationalistic sentiment trade liberalization. American voters Trans-Pacific Partnership (TPP)—a that includes the elected Donald Trump on promises to regional trade agreement covering protect US manufacturers and their 12 countries that account for around Brexit vote in the workers against import competition 40 percent of the global economy— from emerging economies. And Trump despite it having already been signed United Kingdom is only the most prominent example by each of the proposed members of a new global wave of nationalistic (though it had been awaiting and the election of sentiment that includes the Brexit ratification in the United States). vote in the United Kingdom and the politicians on populist, election of politicians on populist, Fortunately, it is possible that the anti-globalization anti-globalization platforms in Europe, remaining TPP signatories will proceed Australia, and elsewhere. with a similar type of agreement that platforms in Europe, leaves out the United States, taking a broader scope and possibly including Australia, and China. elsewhere.

a o a ae easici

Global output growth (%) 7

6

5

3 1995-1999

2 1990-1994 1

0 0.5 1.0 1.5 2.0 2.5 3.0 Elasticity of global trade Source: World Trade Organisation; Deloitte calculations Note: Global output growth is the average growth in production of goods in a five-year period. Elasticity of global trade is the ratio of the average growth of global export volumes of goods and of global production of goods in a five year period.

eoie iesi ess esseoieco

61 Voice of Asia | Trade to Trump protectionists and boost global growth

Indeed, many are encouraged by Here’s the good news: The rest of consumption—the spending by the potential to leverage the existing the slump is cyclical households and governments. In Regional Comprehensive Economic Cyclical? That means it’s temporary, contrast, investment—the spending Partnership negotiations (RCEP)— and indeed, the signs indicate an on physical capital such as roads, which includes ASEAN, Australia, China, impending upswing. The clearest factories, computers, office buildings, Japan, India, Republic of Korea, and cyclical influence on trade in recent and shopping centers, all of which New Zealand—into a broader TPP-style years has been the global financial improves the economy’s productive agreement. crisis, which clearly had an effect on capacity—remains weak. Indeed, data the volume of global trade activity. from the Organisation for Economic Moreover, trade liberalization is The impact on financial markets— Co-operation and Development only one aspect of what drives including the availability of credit, (OECD) shows that the level of trade volumes. Other forces— borrowing costs, exchange rates, investment spending across the G7 including greater integration of and commodity prices—added to economies in 2016 was exactly the economies, technological change, and weakness in trade. same as it was a decade ago. improvements in logistics—are set to continue. However, most of those effects have That has important implications been worked through. So why is for future growth. Spending on Trade has been an important there any lingering impact on global investment—capital expenditure—is a contributor to Asia’s rising prosperity, trade, more than eight years since the bet on the future, and firms will invest but the gains of the past were artificially collapse of Lehman Brothers? Part only if they can expect an adequate good, and the politics of the future are of the answer to that question lies in return on that investment. In part, problematic. Yet the outlook is better chart 7. that expected rate of return is driven than you think. by an anticipation of future economic That chart shows the breakdown of growth. Paradoxically, investment also spending across the seven major helps to underpin stronger economic advanced economies known as growth into the future, including by the Group of 7 (or G7). Growth boosting productivity. since the global financial crisis has been driven by private and public

a ooes of ecooies

Index: March quarter 2006 100 Private 115 consumption GDP 110 Government consumption 105

100 Investment

95

90

85

80 2006 2007 2008 2009 2010 2011 2012 2013 201 2015 2016

Source: Organisation for economic Co-operation and development; Deloitte calculations

62 Voice of Asia | Trade to Trump protectionists and boost global growth

In turn, that means low investment Three reasons Asian trade will today will weigh on economic growth surprise on the upside in 2017 tomorrow. First: World trade volumes were temporarily damaged by successive So the failure of investment to recover crises and shocks, the effects of more quickly in G7 economies also which are finally wearing off. has important implications for trade. The global economy suffered an As chart 8 shows, changes in the unusual sequence of shocks over the composition of economic growth past decade. But the world economy can generate changes in the trade and global businesses have adjusted to intensity of an economy. The post- those shocks and are coming to terms 2007 change in the composition of with them. the G7 economies toward consumer spending and away from investment With no new shocks in evidence and the has contributed to a shift in trade damage of previous shocks wearing off, intensity. As a result, the elasticity of business confidence is recovering and trade across G7 economies—and, demand is likely to normalize. importantly, their trading partners in Asia—has dropped. This recovery is already evident in the US economy, which is likely to grow by Still, there is an upside to the cyclical around 2.2 percent in 2017 despite story about trade. We think the pace of some weakness in recent quarters, and, Asian trade growth will surprise in 2017. increasingly, in Europe.

Chart 8. Global average share of intermediate and final ios i oesic iese a cosio

Share of imports (%) 18 1995-2002 2003-2011 16

1

12

10

8

6

2

0 eeiae ios ia ios eeiae ios ia ios In domestic investment In domestic consumption

Source: Socit Gnrale based on Veerendaal et al. (2015) Notes: Data represents global average shares. eoie iesi ess esseoieco

63 Voice of Asia | Trade to Trump protectionists and boost global growth

a ice ie A a oaie oe o A e a cooi ices ae fae oaie oes ecoei

% y/y ooi ices % y/y 100 e ices 30

80 20 60

0 10

20 0 0

-20 -10 -0

-60 -20 Jul 10 Jul 11 Jul 08 Jul 09 Jul 12 Jul 13 Jul 1 Jul 15 Jul 16 Jan 10 Jan 11 Jan 12 Jan 08 Jan 09 Jan 13 Jan 1 Jan 15 Jan 16 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 1 Mar 15 Mar 16 Mar 01 Mar 02 Mar 03 Mar 0 Mar 05

Source: CPB World Monitor; Institute Source: CPB World Monitor; Institute of Shipping Economics and Logistics (ISL) of Shipping Economics and Logistics (ISL) eoie iesi ess esseoieco eoie iesi ess esseoieco

Our take is that the world economy It hasn’t just been trade volumes ••Second, China’s exporting of is finally emerging from a dark period which have experienced subdued industrial capacity to other countries of successive major shocks, and what growth in recent years. Trade in the region. we are seeing is the natural healing values (the combination of both process that occurs in economies volumes and prices) have also been Each of these factors is expected to as the worst effects of shocks wear depressed. That has been worsened have a diminishing impact on prices. off. This is forming a base for a by downward pressure on prices Commodity and energy prices appear more resilient recovery around the generally, including in relation to to have bottomed, and indeed, the world and higher international trade commodities and energy (see chart 9). prices of some commodities, such as volumes—so long as no new shocks coking coal, have increased sharply materialise. Softness in prices has been driven in recent months. The US dollar by a lack of demand in the global may climb further against other Second: Merchandise trade values economy, evidenced by weak global major currencies, but only modestly. have been depressed by growth and very subdued levels of Manufacturing capacity is expected to deflationary forces, which investment. Two additional factors are continue to shift from China to lower- are now easing, while leading also relevant when considering weak cost producers in the region, but, in indicators suggest volumes are trade value growth: time, wage rates will rise in lower- ready to lift as well. income Asian economies as well. ••First, the strength of the US dollarhas reduced the dollar price of internationally traded goods.

64 Voice of Asia | Trade to Trump protectionists and boost global growth

The value of world trade is therefore likely to trend upward in the near to medium term, as negative price effects from the tumbling commodity and fuel prices bottom out, while leading indicators for volume growth also suggest a bump in trade volumes is looming.

At the same time, trade volumes will such as wearable technology and Third: China’s cyclical recovery will rise again. New export orders are larger-screened cellular devices. aid global trade, but structural climbing around the world, though the changes will continue to exert a ••Sea cargo and air freight volumes expansion is somewhat patchy: drag. are another leading indicator of China has seen growth moderating ••Taiwan, is enjoying a firm recovery, trade that is rebounding. Container from double-digit figures to relatively with export orders rising sharply in volumes have been climbing steadily placid sub-8 percent growth in recent recent months. since mid-2016 (see chart 11), while years. The softening trajectory of growth in air freight volumes is on ••If not for labor strikes in Korea, a China’s economy can be attributed the rise. global export powerhouse, new to a difficult but necessary transition export orders would probably have from an investment-fueled, export- That’s good news. The value of world been much stronger there too. led, and manufacturing-based trade is therefore likely to trend economy to one that is more reliant ••The latest indicators of export upward in the near to medium term, on services and consumer spending. demand and import orders in China as negative price effects from the Furthermore, the build-up of debt, also suggest improvement following tumbling commodity and fuel prices particularly in the corporate sector, a poor 2016. Indeed, weakness in bottom out, while leading indicators continues to weigh on business China’s trade growth over the last for volume growth also suggest a sentiment. 12 months has undermined trade bump in trade volumes is looming. growth in Asia more generally, but there are genuine signs of a However, policymakers have shown turnaround. a willingness to unleash large-scale stimulus measures in a bid to inject ••Electronics components demand, growth impetus into the economy, another leading indicator of trade including massive monetary easing volumes, is also rising. A slew of and concerted fiscal spending. As a measures for demand in the tech result, economic growth has held up sector—semiconductor sales, book- relatively well, even though private to-bill ratios for semiconductor investment levels continue to trend equipment manufacturers, and US downward steadily. This greater orders for electronic components— vigor in aggregate demand will in are all rising, some at the fastest rate turn feed into regional trade and since 2013, powered by booming production networks (of which China consumer interest in new products is a key node), thereby boosting trade volumes across Asia.

65 Voice of Asia | Trade to Trump protectionists and boost global growth

a a oas aio eai iicaos ae i aie assie sis

% y/y (%) 10 10

130 5 120

0 110 ia 100 -5 90 -10 80 1990 1992 199 1996 1998 2000 2002 200 2006 2008 2010 2012 201 Jul 11 Jan 05 Jun 10 Oct 1 Apr 08 Feb 06 Sep 13 Aug 12 Nov 15 Mar 07 May 09

Source: CEIC database Source: CEIC database eoie iesi ess esseoieco eoie iesi ess esseoieco

a ias foei ae ae a os of cooes sae of oss eos as a sae of eos eeece o VA as fae oe ae is ei ceae ii ia

(%) (%) 60

0 55

35 50

30 5

25 0

20 35

15 30 2011 1995 2000 2005 2008 2009 2010 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: OECD TIVA database; Deloitte Source: OECD TIVA database; Deloitte calculations from UN Comtrade database calculations from UN Comtrade database eoie iesi ess esseoieco eoie iesi ess esseoieco

But structural changes also mean the Asian trade environment is increasingly reliant on China. We use the concept of global value chains (GVCs) to analyze China’s influence on economic activity in the region, as it provides a good measure of trade’s actual impact on an economy. This value-added-to-trade approach measures value creation at different stages of the production process and identifies those who capture that value. This is a superior approach because it is now clear that it is intangible activities such as research and development or marketing that command higher value, while low-cost manufacturing adds the least value.

66 Voice of Asia | Trade to Trump protectionists and boost global growth

GVCs optimize the entire production This table shows that, should there In general, however, there are process but are also a double-edged be a major contraction in Chinese offsetting factors at play. At the sword as imports are fed into exports trade, the main losers will be Taiwan, same time that dependency on of another country. As value chain Korea, Japan, and the Philippines. In China for Asian trade has expanded, concentration builds in China, the contrast, India has relatively modest manufacturing capacity has been country’s dependence on foreign dependence on China for trade value shifting to other countries in the value added in Chinese exports creation. These structural trends region. Given the broader transition has decreased: more value is being in intra-Asian trade are a potential under way in China—from investment- created within the country (see charts vulnerability: they present a growing led growth to consumer- and services- 13 and 14). risk to Asian prosperity should further led growth—this shift in capacity is global (or Chinese) shocks occur. important. Asia is increasingly plugged into China-centric value chains. Related Many see other structural challenges, to that, we find that, across Asia, most notably the rise of nationalistic domestic value added in exports has politicians and the potential for more fallen away over time. Table 1 shows liberal trade policies to be unwound. the actual dependence of major Asian The first few months of the Trump economies on China for trade value presidency are expected to reveal the creation. extent to which these concerns are justified.

Table 1: Country dependence on China for trade value creation

(%) 1995 2000 2005 2008 2009 2010 2011

Taiwan 5.28 7.63 19.47 20.93 20.06 20.56 19.91 Korea 3.64 6.22 14.36 13.84 14.25 14.95 14.44 Japan 2.48 4.55 9.92 10.98 11.39 11.74 12.22 Philippines 0.82 2.32 11.65 14.99 13.30 12.43 11.61 Hong Kong 5.55 7.08 8.99 9.27 9.60 10.16 9.96 Malaysia 1.38 3.21 7.11 7.98 8.86 9.96 9.94 Australia 1.65 2.72 5.72 7.26 6.95 8.43 8.96 Singapore 1.34 2.78 6.61 6.15 5.99 7.10 7.30 Thailand 1.22 2.73 5.55 5.98 6.52 7.06 6.88 Indonesia 1.66 3.27 5.04 5.10 5.26 5.94 6.55 Vietnam 1.23 3.09 4.81 3.98 4.17 4.88 5.39 India 0.55 1.41 3.37 3.30 3.25 3.69 3.69 New 1.00 2.14 2.64 2.89 3.31 3.82 3.63 Zealand

Source: OECD database Note: This data represents the value a country adds to Chinese exports as a proportion of value that country adds to its own exports. This helps illustrate a country’s dependence on China for its trade value creation. A higher number means greater dependence on China.

67 Voice of Asia | Trade to Trump protectionists and boost global growth

However, it is happening more Sri Lanka.3 Much of the manufacturing The timing and extent of a shift in slowly than many realize. Chart 15 capacity moving away from higher- manufacturing to emerging Asian shows that China has continued to cost regions of China, however, is countries outside China will depend increase its share of global clothing simply moving to lower-cost regions not only on relative labor costs but on and textiles exports in recent years, within the country, not least because the degree to which China continues despite evidence that manufacturers of government incentives. to seek to encourage relocation of are already voting with their feet and factories within its borders (rather shifting production sites away from That said, the widening cost than within Asia) and the pace with higher-cost regions of China, such as differential and growing sophistication which alternative countries establish the Pearl River Delta near Hong Kong. likely means that these incentives are the infrastructure and regulatory simply delaying the inevitable. Indeed, requirements needed to support One estimate suggests that the Deloitte’s 2016 Global Manufacturing an expansion of the manufacturing number of factories owned by Hong Competitiveness Index noted industry. Manufacturing labor Kong companies in the Pearl River that, by 2020, Malaysia, Indonesia, costs in these five Southeast Asian delta fell by around 33 percent Thailand, India, and Vietnam are all economies (Malaysia, Indonesia, between 2006 and 2013,2 while a expected to rank among the top 15 Thailand, India, and Vietnam) are recent survey shows that just over countries in terms of manufacturing already well below costs seen in one-third of the manufacturers in competitiveness. These countries China. For example, manufacturing the region plan to shift production are already featuring in the minds labor costs in Indonesia are currently capacity to cheaper locations within of global executives seeking an around one-fifth of the level in China, China or to other countries in alternative to China. while costs in Vietnam and India are Southeast Asia, Bangladesh, India, or approximately half the level in China.

Chart 15. Share of global clothing and textiles exports, China and other developing Asian economies

Share of global exports (%) 0 Clothing – China Textiles – China 35

30

25

20 Clothing – Other 15 developing Asian economies 10 Textiles – Other 5 developing Asian economies

0 1990 1995 2000 2005 2010 2015

Source: World Trade Organisation; Deloitte calculations Notes: Data is measured as a share of the value of global exports measured in constant US terms. The following countries are included in ‘other developing Asian economies’: Bangladesh, Indonesia, Malaysia, Mongolia, Nepal, Pakistan, the Philippines, Laos, and Vietnam.

68 Voice of Asia | Trade to Trump protectionists and boost global growth

There are also longer-term economics—over time, a rising share global economy, including business competitive advantages that of global incomes are being spent and professional services. This has Southeast Asia has over China. For on services. That has benefited underpinned service exports in a example, over the next 30 years, the countries, such as India in particular, number of major Asian economies. working-age population in the ASEAN that have prioritized services rather For example, India’s major service region is projected to expand by than manufacturing as a platform for export is computer services, followed almost 85 million people. Over the economic development, while services by business services and then same period, China’s working-age trade is also far more likely to escape technical and trade-related services. population is projected to shrink any effects of populist protectionism India’s IT exports have more than by more than double that amount in the coming years. doubled over the last six years, and (around 175 million people). exports now account for more than Although the gains in services will two-thirds of total revenue for the It therefore seems likely that other be a story for the ages, it has long Indian IT sector.4 As chart 16 below Asian economies are ready and been evident in the trade data. Rapid shows, ICT services exports also able to fill at least part of the gap growth in services has meant big account for around two-thirds of total that China’s rebalancing toward strides in exports of services too. services exports from India, a far consumption and services means for This has been possible in the last higher share than most other Asian trade. This appears particularly true decade due to the information and economies. It is no surprise, then, because the pace of relative decline in communication technology revolution that Indian service exports are more manufacturing in China is slower than of mid-1990s and a boost to growth sophisticated than the average level it is broadly understood to be, while in technology, transportability, and seen across high-income countries.5 the longer-term labor force dynamics tradability that have in turn changed in Southeast Asia are favorable. the nature and tradability of services.

Will services trade surprise as Furthermore, exports in services well? have kept pace with changing global The structural strength in the demand dynamics and a shift toward more for services is accepted wisdom in technology adoption in all areas of the

a seices eos as a sae of oa seices eos seece ecooies

(%) 80

70

60

50

0

30

20

10

0 India China Indonesia Singapore Japan Malaysia Korea Australia Thialand Hong Kong New Zealand

Source: World Bank eoie iesi ess esseoieco

69 Voice of Asia | Trade to Trump protectionists and boost global growth

a ae of Asias coecia seices eos seece ecooies

(%) 25

20

15

10

5

0 India Japan China Korea Taiwan Vietnam Thailand Maylasia Australia Indonesia Singapore Hong Kong Phillippines New Zealand

Source: World Trade Organisation; Deloitte calculations eoie iesi ess esseoieco

These technological advancements The most recent performance of again provides a clear example, have also had a broader impact on the services sector has been more with the country making significant services exports, with rapid growth circumspect in light of the subdued progress on signing comprehensive being facilitated by the fact that many growth in developed economies. bilateral trade agreements that of these services do not require There has been moderation in the cover services, including with South face-to-face interaction and have the rate of growth of some important Korea, Japan, Malaysia and Singapore. potential of being stored and traded services while others, such as Further, India’s FTA with ASEAN came digitally. computer services, have improved. into effect in mid-2015, while the wider This performance is expected to Regional Economic Comprehensive In fact, over the 12 years to 2013, improve in the coming years as Partnership includes India, along global commercial services exports developed economies record more with the 10 ASEAN countries and the grew at an average annual rate of 10 robust growth. remaining FTA partners: Australia, percent, with India helping to lead China, Japan, South Korea, and New the way with average growth of 20.1 There are further reasons to be Zealand. percent, followed by China at 16.5 upbeat on services trade in the percent. As a result, India is now medium term. The rising share of Overall, the growing influence of the world’s eighth-largest services services within trade flows overall services trade globally will have an exporter and the third-largest in Asia means that there has been a growing increasingly positive effect on Asian (see chart 17). focus on services within free trade trade into the future. agreement (FTA) negotiations. India

70 Voice of Asia | Trade to Trump protectionists and boost global growth

Longer-term tailwinds But these fears have been overstated. So we can point to short-term Although some of the bad news on positives. But there are longer-term trade is here to stay, much of it has tailwinds of importance as well. Two been due to factors that are now stand out: fading:

••The rising Asian economic giants •• World trade volumes were have been shifting their trade temporarily damaged by successive policies toward greater openness crises and shocks, the effects of and global engagement. Their rising which are finally wearing off. Trade will underpin further trade gains values have been depressed by through Asia and the world in the deflationary forces that are now decades ahead. easing, while leading indicators suggest volumes are ready to lift as ••The global swing away from goods well. and toward services is increasingly evident in trade trends too. The ••A boost in the advanced economies gains from trade in services remain is also likely to benefit trade in substantial. services.

••Finally, China’s recovery will aid What’s next? global trade. Cyclical and structural factors have caused trade expansion to All this will help reinvigorate trade underperform global growth in recent growth in 2017, which will be a clear years. That has created a degree of positive for Asia. pessimism about the future of trade, and those fears have been further And there are longer-term gains on stoked by the election of an avowedly the trade menu as well, with the rise protectionist US president. of India and the rise of services likely to prove a dynamic duo for trade prospects in the years to come.

1. Deloitte calculations using data from the World Trade Organisation

2. See Mark Magnier, “How China is changing its manufacturing strategy,” Wall Street Journal, June 7, 2016, www.wsj.com/articles/how-china-is- changing-its-manufacturing-strategy-1465351382

3. See James Kynge, “ASEAN countries to benefit from China’s waning competitiveness,” Financial Times, May 8, 2015, www.ft.com/ content/37a4b088-f582-11e4-bc6d-00144feab7de

4. India Brand Equity Foundation, “IT & ITeS industry in India,” November 2016, www.ibef.org/industry/information-technology-india.aspx

5. Rahul Anand, Kalpana Kochhar, and Saurabh Mishra, Make in India: Which exports can drive the next wave of growth?, International Monetary Fund working paper, May 2015, www.imf.org/external/pubs/ft/wp/2015/wp15119.pdf

71 Voice of Asia | Trade to Trump protectionists and boost global growth

Overall, the growing influence of services trade globally will have an increasingly positive effect on Asian trade into the future.

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About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2016 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited MCBD_Adel_12/16_ 053873 73 Acknowledgements

The following economists contributed Sitao Xu There are many people to thank to creating the rich tapestry of Chief Economist and Partner across the entire Voice of Asia team: insights that feature in Voice of Asia, Deloitte China Beijing Edition 1 – January 2017: Email: [email protected] Stephanie Choy, Franklin Wright, Chaanah Crichton and Anis Chakravarty Manu Bhaskaran Peita Calvert for your fantastic Lead Economist and Partner CEO professionalism, work, guidance and Deloitte India Mumbai Centennial Asia Advisors Pte Ltd insights across this edition. Email: [email protected] Alliance Partner Email: [email protected] Carmen Roche, Neil Glaser, Tass Richa Gupta Gyenes, Troy Bishop, Matthew Economist Yoichiro Ogawa Budman, Junko Kaji and the Deloitte India Delhi Asia Pacific Regional Managing Director Deloitte University Press team for Email: [email protected] Deloitte Global and CEO providing creative, design and editorial Deloitte Japan Tokyo support. Nobuhiro Hemmi Email: [email protected] Partner and Head of Global Business Michelle Mountford, Ellouise Intelligence Ian Thatcher Roberts, James Allnutt, Asees Deloitte Japan Tokyo Asia Pacific Deputy Regional Managing Bajaj and Jason Tan for your valuable Email: [email protected] Director work and contribution towards the Deloitte Global Sydney content. Chris Richardson Email: [email protected] Partner Deloitte Access Economics Ira Kalish Australia Canberra Chief Economist Email: [email protected] Deloitte Global Los Angeles Email: [email protected] Rishi Shah Economist Thomas Pippos Deloitte India Delhi CEO Email: [email protected] Deloitte New Zealand Wellington Email: [email protected] Ric Simes Director Soo Earn Keoy Deloitte Access Economics Regional Managing Partner Australia Sydney Financial Advisory Email: [email protected] Deloitte South East Asia Singapore Email: [email protected] Stephen Smith Lead Partner Deloitte Access Economics Australia Canberra Email: [email protected]

74 The following economists contributed Zoe Wu to creating the rich tapestry of Senior analyst insights that feature in 2017: A ray of Deloitte China Research hope amidst uncertainty Deloitte China Shanghai Email: [email protected] Patricia Buckley Director Claire Rao Economic Policy and Analysis Analyst Deloitte U.S. Deloitte China Research Email: [email protected] Deloitte China Shanghai Email: [email protected] Sitao Xu Chief Economist and Partner The following experts are major Deloitte China Beijing contributors for Unleashing the value Email: [email protected] of the Industrial internet of things

Manu Bhaskaran Ricky Tung CEO Partner Centennial Asia Advisors Pte Ltd China Industrial Products & Services Alliance Partner Leader Email: [email protected] Deloitte China Beijing Email: [email protected] Chris Richardson Partner Tianbing Zhang Deloitte Access Economics Partner Australia Canberra China Industrial Products & Services Email: [email protected] Consulting Leader Deloitte China Shanghai Email: [email protected] The following economist and experts contributed insights and Tonny Xue research support for China 2017: Partner Resilience in the face of uncertainty China Technology Risk Service Leader Deloitte China Beijing Sitao Xu Email: [email protected] Chief Economist and Partner Deloitte China Beijing Jill Qu Email: [email protected] Senior Manager Deloitte China Research Vanessa Xu Deloitte China Beijing CEO Email: [email protected] FountainCap Research & Investment Email: [email protected]

Lydia Chen Director Deloitte China Research Deloitte China Shanghai Email: [email protected]

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