China slows down, Japan catching up. What is the general assessment of both economies so far?

The two largest economic powerhouses, China and Japan reported their  economic numbers on manufacturing and business confidence respectively on July 01, 2013 which showed a significant divergence in terms of economic growth prospects. In China, the country’s National Bureau of Statistics, together with China Federation of Logistics and Purchasing reported that the official Purchasing Managers’ Index (PMI) for the month June 2013 fell to 50.1, in line with a Bloomberg survey of economists, from the previous month’s figure of 50.8. The final HSBC PMI number for June came in at 48.2, largely unchanged from the latest flash estimate released by the bank approximately two weeks ago. Readings above 50 signal expansion.

On the other hand, the Japanese Government released its quarterly ‘Tankan’ (Business Confidence) index for the period ending June 2013 which showed general optimism among many businesses in Japan. The figure stood at a plus 4 as of end of June, up from a minus 8 in March. A Bloomberg survey of economists forecasted the gauge to be approximately plus 3. Large corporations from all industries plan to increase their capital expenditures (Capex) by approximately 5.5 percent in 2013 through March 2014.

With the latest economic releases from both Asian economies signalling the maiden start to the second half of 2013, it offers quite a significant mixed picture as to which of the two Asian economic giants are leading the region in their quest for continued and sustainable economic growth. At this point, it remains mixed regarding the long-term direction both Asian economies will move. One of the reasons for making this assessment is that for China, the economic slowdown has featured quite prominently in most financial presses since the new Chinese leadership transition which took place in April 2013. With the recent credit crunch that took place since June 14, to the intervention by the Peoples’ Bank of China (PBOC) on June 20 with the injection of some USD 8.2 billion into the financial system, it does reveal quite a significant number of weaknesses in the Chinese financial system, one of which is the ‘shadow’ banking system which has nearly push the country to the brink of a liquidity crisis, and could destabilise the entire financial system of the country. The pace of lending by Chinese banks have increased in the past prior to the onset of the sudden spike in the interbank rates, and most of the loans are diverted to the banking and real estate sectors, but has not been proportioned out to the small and medium-sized enterprises (SMEs) who are struggling to pay their bills, and input costs. The latest HSBC PMI reading does reflect the severity of the impact of the credit crunch it has on SMEs, given that the statistic is more heavily weighted towards the SMEs, and is said to be a true reflection of the manufacturing outlook in China, apart from the dominance of the State-Owned Enterprises (SOEs).

For Japan, the latest quarterly Tankan survey largely offers mixed responses coming from various economists, and sceptics who are not convinced that the latest figures will be sustainable in the long-run. The Upper House of the Japanese Parliament is set to head for its first parliamentary elections on July 22, 2013 following the transition to the new leadership led by Liberal Democratic Party (LDP) leader and current Prime Minister, Shinzo Abe. His brand of so-called ‘Abenomics’ consists of ‘three arrows’ (Fiscal, Monetary, and Structural reforms). Based solely on economic concepts, the general focus of Abenomics is a weakened Japanese Yen currency, along with the three arrows, could help to revitalise Japan’s economic growth to a more sustainable footing, but in practical terms, implementation of Abenomics does incur costs, namely debt and leverage, if not properly managed with sound financial management, could cause a major destabilisation of the global economy because of the heavy public debt burden that is mostly financed by domestic households, which are rapidly declining, along with fewer birth rates and increasing greying population.

Although the latest quarterly Tankan survey for June showing its first positive read since the implementation of Abenomics and economic reforms, sceptics feel that it is still early to tell whether Japan has really taken a turn for the better in resolving its decades-old economic doldrums and emerge as a revitalised economic powerhouse. The country is still mired with loads of debt, averaging at approximately double of its overall Gross Domestic Product (GDP) growth. With the population declining, along with a large greying population, this results in a severe financial burden across all industries in Japan, including health care costs. Others pointed to last week’s release of generally positive set of economic figures coming from industrial production, unemployment, consumer prices, and retail sales data as signs of a real recovery and a relative measure of the effectiveness of Abenomics thus far. With parliamentary elections set to take place on July 22, it remains uncertain as to what are the general policy directions of Prime Minister Abe and the role of structural reforms it might have on the Japanese economy, as actual details are not fully disclosed until after July 22, and the duration of the implementation of such structural reforms is uncertain. This might also explain the unwillingness of many in the financial community to openly declare their bullishness on the pace of recovery in Japan, but, generally, the results from the Tankan survey, along with the latest set of economic figures released last week, do suggest some signs of the effectiveness of Abenomics in tackling the country’s decades old economic slowdown, however, scepticism still remains, and this is quite normal for many to think that way.

The maiden release of some of the latest economic figures for the second half of 2013 from both China and Japan do offer mixed pictures regarding the general direction of both economies. The recent release of China’s manufacturing gauges, followed by the recent credit crunch do highlight quite a significant number of cracks within the financial system, which is part of the pillar of economic growth for China. If the credit issues, and the availability of credit are not being directed at the right sectors according to sound economic fundamentals, rather than basing the decisions on national policy such as the continuous stressing on economic growth at no cost, then China might face quite a significant number of issues as it fails to tackle the environmental, and social issues on hand in the face of the rapid changes taking place in the economy.

For Japan, the general pace of implementation of Abenomics seems to be working based on the recent release of key economic indicators; however, the government has quite a significant amount of work in tackling its fiscal and structural policies as part of the overall balance in tackling its economic woes in the past. The so-called ‘three arrows’ is the right policy move, but at the same time, the government needs to change quite a lot of traditional mind sets of many Japanese people regarding immigration, population, and education reforms which will hopefully bring out the revitalisation, and vibrancy of Japan, and in the process rejuvenate the economy.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc