Voice of Asia – strong rest of 2020 in China boosts chances of regional rebound

Published: 29 April 2020

China's economy looks set to recover from the impact of COVID-19 the second half of 2020, providing a welcome boost for the rest of Asia – so long as one major risk does not come to fruition – according to the latest Voice of Asia report from Deloitte.

The Chinese economy posted a 6.8 percent contraction in GDP for 1Q20, and is expected to be flat in the second quarter, according to the report, with a strong recovery in the second half of the year as capacity utilization returns to normal and stimulus measures take effect. This second half revival is set to feed through into rising demand for imports from Hong Kong, Taiwan, South Korea and Singapore, although the Hong Kong economy, given its reliance on Chinese mainland tourists and inflationary peg to USD, is expected to suffer a large contraction, according to the report.

"We don't do a repeat of the "flood irrigation" stimulus we saw in the aftermath of the GFC. Instead, stimulus will likely focus on new technology infrastructure investment, measures to promote household consumption, and targeted credit easing," says Deloitte China Chief Economist Sitao Xu. "This type of fiscal stimulus, which we expect to be announced soon, could drive GDP growth above 3 percent for the full year."

The major downside risk to the report's outlook is an increase in financial stress in emerging markets even as demand recovers, with the region having suffered a massive, USD83.3 billion outflow of capital in 1Q20 alone. There are signs of stress already in the US LIBOR-OIS spread, and regional currencies, equities and bonds are likely to decline further. Meanwhile, the rush to safe haven USD could threaten Asian economies' ability to service their dollar-denominated debt; corporate debt refinancing could be challenging, with a large amount of bonds due for repayment in the next 12 months; and the "toxic mix" of sharply slowing growth, tightening financial conditions and existing high leverage could risk banking sector instability.

As well as setting out prospects for regional economies, the Voice of Asia report takes a deep dive into one of the major issues arising from the COVID-19 pandemic–pressure on supply chains. The pandemic has highlighted the importance of long-term supply chain resilience, and the report suggests ways in which companies can build that resilience.

"Businesses need to map out their multi-tier supply chains to find out which suppliers, sites, parts, and products are at risk when potential disruption arises, so they can develop mitigation strategies," says Deloitte China Supply Chain Lead Partner Geliang Gong.

"They can also build hidden back-up networks and adopt a more global perspective. For example, one leading automaker redistributed its supply chain across multiple modes with the same capacity after Japan's 2011 earthquake, and another global player's factories across the world follow the same design, template and manufacturing processes. For some businesses, "re-shoring" is an option."

Access the full Voice of Asia report here.

Highlights of Asia Pacific stimulus measures

Australia

• Policy rate reduced to 0.25 percent and to remain low for "extended period".
• Support measures equivalent to 10 percent of annual GDP.
• Credit extended via central back to lenders equivalent to further 6 percent of GDP.

India

• Central bank cut policy repo rate and to inject liquidity.
• INR1.7 trillion (USD22.4 billion) government stimulus package to support vulnerable in society.
• Statutory and regulatory compliance relief.

Indonesia

• Central bank to buy bonds in primary market.
• IDR33.2 trillion (USD2 billion) in fiscal stimulus.

Japan

• Central bank to buy JGBs, support corporate financing, increase purchases of CPs and corporate bonds.
• JPY108 trillion (USD 1 trillion) emergency fiscal package including cash for households and unsecured loans to some sectors.

Malaysia

• MYR250 billion (USD57.6 billion; 16 percent of GDP) stimulus package.

New Zealand

• RBNZ cut rates and introduced NZD33 billion (USD20 billion) of QE.
• Fiscal support equivalent to about 6 percent of GDP.

Philippines

• Central bank entered PHP300 billion (USD5.9 billion) bond repurchase agreement with Treasury.
• PHP200 billion stimulus package from non-budget sources.
• Budget deficit could reach 3.6 percent of GDP.

Singapore

• Stimulus packages to increase 2020 budget deficit to SGD44.3 billion (USD31 billion; about 9 percent of GDP).

South Korea

• 75bps rate cut.
• Central bank to buy "unlimited" amount of bonds.
• KRW11.7 trillion (USD9.6 billion) supplementary budget for healthcare-related spending.
• KRW50 billion of support for SMEs in soft loans and loan guarantees.
• About KRW50 billion to stabilize equity, bond and short-term funding markets.

Thailand

• 50bps rate cut.
• THB400 billion (USD12.2 billion) fiscal package equivalent to about 2.4 percent of GDP.