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Asia goes its own way with the pandemic and inflation

Japan is getting closer to NATO, the US, Australia and South Korea as part of the growing Asian defence alliance. China seeks alliances and client states wherever they can be found.

| 6 min read

Both China and Japan import a lot of energy, but both still have inflation around 2%. Both have central banks that target money growth as part of their policy mix, with China seeking to grow money in line with nominal GDP and Japan expanding its monetary base to try to get inflation up to the 2% target. Both countries had a bad experience of Covid-19 and have relied heavily on restrictions to combat the disease, with negative impacts on output. They have been reluctant to rely on vaccines and herd immunity from the spread of milder versions of the disease, continuing with more lockdowns when cases are identified.

There the similarities end. Japan is getting closer to the US, Australia and even to Korea as part of the growing Asian defence alliance. It is now also more closely collaborating with NATO. China is seeking alliances and client states wherever they can be found, especially where they give China access to important natural resources needed for the development of its industrial/military complex. China and Japan are sharpening old antagonisms.

China-Russia relationship still evolving

China has absorbed the bad news from its Russian ally that the invasion of Ukraine has proved so much more brutal and so much less successful than Mr Putin doubtless forecast to his friend President Xi. The Chinese government keeps off the topic in its public communications and will not be drawn into comment. What assistance they may be offering Russia is also low-key and not for broadcast. It is likely China will buy more Russian energy at cheaper prices in mutually advantageous transactions. China has in the past entered joint military exercises with Russia and will be watching the military results in Ukraine carefully to learn for its own purposes.

President Xi was in Hong Kong for the 25th anniversary of Hong Kong being placed under Chinese rule. He spoke to welcome the new Chief Executive John Lee and praised the One country two systems mantra that they have always used. In his view, Hong Kong enjoys a high degree of autonomy from the Chinese central government in its special administrative region and is also an example of Chinese-style democracy.

There will be no political freedom western style to criticise the Chinese government or to form proper opposition parties with different approaches.

The sting rests with the strong assertions that those who exercise these devolved powers need to be patriots. Traitors are rooted out from government and blocked from standing in elections. He reminded his audience of the changes to electoral law to ensure the right people stand for office. This much has all been well reported and understood as China has removed the old opposition from the Legislative Council. There will be no political freedom western style to criticise the Chinese government or to form proper opposition parties with different approaches.

What was more muddled in the address was how much economic and commercial freedom Hong Kong will enjoy. The President wanted to imply Hong Kong would be allowed western-style business freedoms to continue to be one of China's main access points to and from the west. He did not mention his idea of the dual economy, but the drift may be that Hong Kong can work to more liberal business rules when dealing with foreigners. However, he reminded his audience that the thoughts of President Xi revolve around socialism with Chinese characteristics.

President Xi has been driving changes on the mainland that require greater equality, less private ownership, and less pursuit of personal profit and fame. Those policies were implicit, leaving people in doubt about how much commercial freedom Hong Kong will be allowed even when dealing with the outside world. The new system means the tall entrepreneurial poppies can get cut down to size. It is safest to assume business freedoms must not lead to capitalist excesses.

Beijing has room for manoeuvre

With Chinese inflation at 2.1% and growth well below the planned 5.5% annual rate for this year, China has some further scope to loosen policy. The stock market has started to perform a bit better after a bad start to 2022, as the central bank eases up a little. Money growth is outrunning nominal GDP and there could be further modest rate reductions. Unemployment at 5.9% in May is higher than they want.

People’s Bank Governor Yi Gang is seeking to increase finance available to smaller and micro-businesses and to boost investment money for green projects. There could be a further rally in shares as and when lockdowns continue to happen and as a slightly more accommodative policy helps. Overall, however, the drive to more state control of prices, profits and investment continue, with more activity being routed through nationalised businesses. It is still no time to be a well-known, successful social-media-savvy entrepreneur. It is not an aim of the Chinese state to help foreigners make money out of their economy.

The Japanese authorities are keeping their basic loan rate at 0.3%, last changed in 2008, their short rate at -0.1%, and their ten-year bond rate close to zero. The central bank continues to buy ETFs, REITs, commercial paper and corporate bonds, as well as government debt. It expects some growth this year alongside inflation of around 2%. Its policy is still geared to the worry that inflation will fall too much once energy stabilises, hence the continuation of quantitative easing. This background could continue to support relatively good stock-market performance and a weak currency for longer. Meanwhile, its inflation is spreading to a wider range of sectors in its economy implying that, even in Japan, loose policy eventually triggers some price rises.

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Asia goes its own way with the pandemic and inflation

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