Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Exports were the key driver of China's acceleration in GDP in 4Q 2020, but FAI had been the key factor buoying the economy in April-December 2020. The low base will help power a substantial acceleration in YoY growth in 1Q 2021, but the impact of the FAI surge will hurt in 2H 2021, as export opportunities shrink once the rest of the world's production normalizes. In the interim, however, we recommend staying tactically overweight China. China's industrial growth of 7.3% YoY in December 2020 was the fastest in 3.5 years, while the 7.1% YoY growth in 4Q 2020 was the fastest since 3Q 2014. In turn, that powered the 6.5% YoY growth in real GDP during 4Q 2020, the fastest growth pace since 3Q 2018.  The key driver of the faster growth was a surge in fixed-asset investment (FAI) in April-November 2020 (+9.6% YoY), and a sharp acceleration in exports (+16.9% YoY) in 4Q 2020. The record trade surplus of US$212 billion in 4Q 2020 was accompanied by only a modest US$74 billion increase in foreign reserves, reflecting continued net capital outflow even amid the strengthening RMB. Given that China has massive industrial over-capacity, the sustainable response would have been to stimulate domestic consumption to take up that capacity. Retail sales did improve in 2H 2020, but still grew only 4.6% YoY in December and in 4Q 2020. Instead China added hugely to excess capacity (particularly physical infrastructure) with a boom in FAI, up 9.2% YoY in Apr-Dec 2020, the fastest pace since 1H 2016. This approach didn't hurt China in 2020, because the rest of the world's industrial capacity was inoperative, and China's exports consequently soared.      Full year real GDP growth was only 2.3% in 2020, the slowest in 3 decades, primarily because of the steep contraction in 1Q 2020 (the only quarter in which China was partially locked down on account of the Wuhan coronavirus). Consequently, 1Q 2021 will see spectacular YoY growth in all China's economic numbers -- exports, industrial output, FAI, retail sales, EPS growth -- helped by the artificially-depressed base. From 2Q 2021 onwards, real GDP growth will slow significantly (we estimate 5% YoY for 2Q-4Q 2021), as the reopening global economy reduces demand for China's exports, and industrial overcapacity resumes biting. In the near-term (1Q 2021) we recommend staying tactically overweight China.

Exports were the key driver of China's acceleration in GDP in 4Q 2020, but FAI had been the key factor buoying the economy in April-December 2020. The low base will help power a substantial acceleration in YoY growth in 1Q 2021, but the impact of the FAI surge will hurt in 2H 2021, as export opportunities shrink once the rest of the world's production normalizes. In the interim, however, we recommend staying tactically overweight China. China's industrial growth of 7.3% YoY in December 2020 was the fastest in 3.5 years, while the 7.1% YoY growth in 4Q 2020 was the fastest since 3Q 2014. In turn, that powered the 6.5% YoY growth in real GDP during 4Q 2020, the fastest growth pace since 3Q 2018.  The key driver of the faster growth was a surge in fixed-asset investment (FAI) in April-November 2020 (+9.6% YoY), and a sharp acceleration in exports (+16.9% YoY) in 4Q 2020. The record trade surplus of US$212 billion in 4Q 2020 was accompanied by only a modest US$74 billion increase in foreign reserves, reflecting continued net capital outflow even amid the strengthening RMB. Given that China has massive industrial over-capacity, the sustainable response would have been to stimulate domestic consumption to take up that capacity. Retail sales did improve in 2H 2020, but still grew only 4.6% YoY in December and in 4Q 2020. Instead China added hugely to excess capacity (particularly physical infrastructure) with a boom in FAI, up 9.2% YoY in Apr-Dec 2020, the fastest pace since 1H 2016. This approach didn't hurt China in 2020, because the rest of the world's industrial capacity was inoperative, and China's exports consequently soared.      Full year real GDP growth was only 2.3% in 2020, the slowest in 3 decades, primarily because of the steep contraction in 1Q 2020 (the only quarter in which China was partially locked down on account of the Wuhan coronavirus). Consequently, 1Q 2021 will see spectacular YoY growth in all China's economic numbers -- exports, industrial output, FAI, retail sales, EPS growth -- helped by the artificially-depressed base. From 2Q 2021 onwards, real GDP growth will slow significantly (we estimate 5% YoY for 2Q-4Q 2021), as the reopening global economy reduces demand for China's exports, and industrial overcapacity resumes biting. In the near-term (1Q 2021) we recommend staying tactically overweight China. 

China's 2021 Will Look Spectacular in 1Q, but Overcapacity Will Bite Thereafter

Even in 2020, China's M2 grew more than the US and EU; thus, despite a soaring trade surplus, foreign reserves were largely unchanged, suggesting large capital flight. Once the US$ stops depreciating, China will have to tighten monetary conditions. And with the rest of the world returning to near-normal by mid-2021, China's ability to export the excess capacity to which it added in Apr-Nov 2020 (with 9.6% YoY growth in FAI) will increasingly be constrained. Real GDP will decelerate to below 5% YoY growth in April-December 2021. Trim China holdings. Total Social Financing (TSF) has expanded by RMB 33 trillion (US$5.05 trillion) in January-November 2020, 56% YoY faster than the pace of new TSF in Jan-Nov 2019. The massive expansion in TSF enabled fixed asset investment (FAI) to rebound sharply after 1Q 2020, growing 9.7% YoY in April-November 2020 (much faster than the pace of FAI growth in 2019).  China was thus adding to its mountain of overcapacity in infrastructure, industry and real-estate in 2020. With much of the rest of the world locked down (especially in April-June, and only partially reopening thereafter), China has had an excellent 2020 -- using its excess capacity to export PPE (personal protective equipment), electronics/computers/parts to enable work-from-home, and also fill other gaps in global demand that other nations were unable to fill for much of the year. Steel is illustrative: in April 2020, China's steel output expanded 0.2% YoY, while the rest of the world's steel output declined 28.7% YoY. In October 2020, China's steel output rose 12.7% YoY, while the rest of the world's increased 2.3% YoY; in November, however, China's steel output decelerated to 8% YoY growth, while the rest of the world's accelerated to 5% YoY (although steel output was still declining in the US, Japan and South Korea). In 2021, once the rest of the world begins to operate nearer normal capacity, China's ability to grow abnormally fast will be severely constrained. China's M2 has not only expanded nearly 5-fold since August 2008 (while the US's has only expanded 2.5-fold over that period), it has also expanded more in Feb-Nov 2020 (by US$3.9 trillion) than US M2 (which rose by US$3.58 trillion in Feb-Nov 2020) or EU M2 (up by only US$2.2 trillion). The continued debasing of the RMB has led to capital flight -- despite an appreciating RMB (which should have made foreign-currency assets unattractive); the symptom was that foreign reserves stayed largely unchanged despite an ever-widening trade surplus. Once the US$ resumes strengthening, the PBOC will be obliged to rein in TSF by 2Q 2021, causing an economic deceleration, particularly of FAI. As trading partners erect barriers to China's dumping of its excess capacity, China's economic problems will be exacerbated, and real GDP will grow less 5% YoY in 2Q-4Q 2021, with financial-sector problems rising anew.  We recommend trimming China's weight in investor portfolios by March 2021.

Even in 2020, China's M2 grew more than the US and EU; thus, despite a soaring trade surplus, foreign reserves were largely unchanged, suggesting large capital flight. Once the US$ stops depreciating, China will have to tighten monetary conditions. And with the rest of the world returning to near-normal by mid-2021, China's ability to export the excess capacity to which it added in Apr-Nov 2020 (with 9.6% YoY growth in FAI) will increasingly be constrained. Real GDP will decelerate to below 5% YoY growth in April-December 2021. Trim China holdings. Total Social Financing (TSF) has expanded by RMB 33 trillion (US$5.05 trillion) in January-November 2020, 56% YoY faster than the pace of new TSF in Jan-Nov 2019. The massive expansion in TSF enabled fixed asset investment (FAI) to rebound sharply after 1Q 2020, growing 9.7% YoY in April-November 2020 (much faster than the pace of FAI growth in 2019).  China was thus adding to its mountain of overcapacity in infrastructure, industry and real-estate in 2020. With much of the rest of the world locked down (especially in April-June, and only partially reopening thereafter), China has had an excellent 2020 -- using its excess capacity to export PPE (personal protective equipment), electronics/computers/parts to enable work-from-home, and also fill other gaps in global demand that other nations were unable to fill for much of the year. Steel is illustrative: in April 2020, China's steel output expanded 0.2% YoY, while the rest of the world's steel output declined 28.7% YoY. In October 2020, China's steel output rose 12.7% YoY, while the rest of the world's increased 2.3% YoY; in November, however, China's steel output decelerated to 8% YoY growth, while the rest of the world's accelerated to 5% YoY (although steel output was still declining in the US, Japan and South Korea). In 2021, once the rest of the world begins to operate nearer normal capacity, China's ability to grow abnormally fast will be severely constrained. China's M2 has not only expanded nearly 5-fold since August 2008 (while the US's has only expanded 2.5-fold over that period), it has also expanded more in Feb-Nov 2020 (by US$3.9 trillion) than US M2 (which rose by US$3.58 trillion in Feb-Nov 2020) or EU M2 (up by only US$2.2 trillion). The continued debasing of the RMB has led to capital flight -- despite an appreciating RMB (which should have made foreign-currency assets unattractive); the symptom was that foreign reserves stayed largely unchanged despite an ever-widening trade surplus. Once the US$ resumes strengthening, the PBOC will be obliged to rein in TSF by 2Q 2021, causing an economic deceleration, particularly of FAI. As trading partners erect barriers to China's dumping of its excess capacity, China's economic problems will be exacerbated, and real GDP will grow less 5% YoY in 2Q-4Q 2021, with financial-sector problems rising anew.  We recommend trimming China's weight in investor portfolios by March 2021.  

China Has Had a Great 2020, but Over-Capacity Will Cause Headaches in 2021

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>According to FT, <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> digital currency project, Libra, is preparing to launch as early as January 2021 and its value will be backed by a single currency, the US dollar. This project is still awaiting approval from FINMA (the Swiss-based Financial Market Supervisory Authority) and will works as a stablecoin, which is much less volatile than cryptocurrencies such as Bitcoin. </li>
<li>We view the slim-down version of Libra, now called Diem, as a feasible alternative to original proposal. The full-blown version 2.0 of Libra is backed by multiple currencies (such as USD, EUR, and GBP). And 1 Libra is proposed to be calculated as 0.5 LibraUSD, 0.3 LibraEUR, and 0.2 LibraGBP. However, multiple currency reserve will pose addition regulatory obstacles, as how much weights and what currency will be determined. With Libra is backed by USD only now, there is not much road blocks for Libra to be launched next year. </li>
<li>China is accelerating its efforts to launch its sovereign digital currency. In October, the People’s Bank of China published a draft law that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency. The broad acceptance and launches of digital currency is the high conviction idea for 2021, such as China's Digital Currency Electronic Payment (DCEP) system and <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> Libra/Diem projects. We have highlighted China's race to digital currency in the following: <a href="https://www.smartkarma.com/insights/china-a-share-strategy-leading-the-race-for-digital-currency" target="_blank" rel="noopener">China A-Share Strategy: Leading the Race for Digital Currency</a>
</li>
</ul>


According to FT, Facebook Inc A (FB US) digital currency project, Libra, is preparing to launch as early as January 2021 and its value will be backed by a single currency, the US dollar. This project is still awaiting approval from FINMA (the Swiss-based Financial Market Supervisory Authority) and will works as a stablecoin, which is much less volatile than cryptocurrencies such as Bitcoin. 
We view the slim-down version of Libra, now called Diem, as a feasible alternative to original proposal. The full-blown version 2.0 of Libra is backed by multiple currencies (such as USD, EUR, and GBP). And 1 Libra is proposed to be calculated as 0.5 LibraUSD, 0.3 LibraEUR, and 0.2 LibraGBP. However, multiple currency reserve will pose addition regulatory obstacles, as how much weights and what currency will be determined. With Libra is backed by USD only now, there is not much road blocks for Libra to be launched next year. 
China is accelerating its efforts to launch its sovereign digital currency. In October, the People’s Bank of China published a draft law that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency. The broad acceptance and launches of digital currency is the high conviction idea for 2021, such as China's Digital Currency Electronic Payment (DCEP) system and Facebook Inc A (FB US) Libra/Diem projects. We have highlighted China's race to digital currency in the following: China A-Share Strategy: Leading the Race for Digital Currency



Digital Currency: Still Remember Facebook Libra/Diem ?

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have.

*Reversing Course Again: On April 3, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) - the European Union’s financial regulatory body which replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – in the context of the corona virus, released a statement urging insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders” in order to preserve capital. In an odd reversal of course, EIOPA has updated its commentary surrounding European insurance capital management; and  *Asia-Pacific Insurers Still At Risk: Asia-Pacific insurance counterparts previously acted in capital solidarity with their Western peer during COVID-19. Many Asia-Pacific insurers purchased USD-denominated assets in their desperate search for yield in this low/negative rate environment where the impact of credit default and ratings agency downgrades on their investment portfolios is likely to continue to be outsized and challenge capital their ratios. We are hopeful that the Asia-Pacific insurers - particularly in Japan, Australia, Taiwan, and South Korea – don’t behave as desperately as their European counterparts have. 

Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Last week we wrote that accelerating economic integration in the Greater Bay Area is  lies at the heart of China’s strategy to win the battle for economic supremacy.  It is key to China’s future economic prosperity and, directly counters America’s China containment strategy. Beijing recognises China containment will remain the lynchpin of US foreign policy. A Biden US presidency ensures that development of the GBA is only set to speed up. Companies are investing in next generation industries to meet the wants of the GBA’s tech-savvy consumers and are optimistic about revenue growth over the next three years. For investors seeking superior returns the case for investing in GBA companies has never looked stronger.

Last week we wrote that accelerating economic integration in the Greater Bay Area is  lies at the heart of China’s strategy to win the battle for economic supremacy.  It is key to China’s future economic prosperity and, directly counters America’s China containment strategy. Beijing recognises China containment will remain the lynchpin of US foreign policy. A Biden US presidency ensures that development of the GBA is only set to speed up. Companies are investing in next generation industries to meet the wants of the GBA’s tech-savvy consumers and are optimistic about revenue growth over the next three years. For investors seeking superior returns the case for investing in GBA companies has never looked stronger. 

Biden Vs. Xi - What Are Businesses Doing?

China

The FTSE China A50 Index includes the largest 50 A Share Chinese companies by total market cap. 

FTSE China A50 Index (XIN9I INDEX)

China's 2021 Will Look Spectacular in 1Q, but Overcapacity Will Bite Thereafter

FAI surge of 9.2%YoY in Apr-Dec 2020 will hurt once global economy normalizes in 2H 2021. But in the interim, 1Q 2021 will be spectacular for...

Prasenjit K. Basu

China Has Had a Great 2020, but Over-Capacity Will Cause Headaches in 2021

TSF (Jan-Nov 2020) expanded by 56% YoY, enabling FAI to grow 9.6% YoY in Apr-Nov20. But this exacerbated excess capacity. By mid-'21, tighter...

Prasenjit K. Basu

Digital Currency: Still Remember Facebook Libra/Diem ?

The broad acceptance and launches of digital currency is the high conviction idea for 2021, such as China's Digital Currency Electronic Payment...

Roger Xie

Asian Insurers – Mea, Mea EIOPA

ASIA INSURERS: On April 3, 2020, EIOPA temporarily suspended capital management activities," but just reversed course. Many Asia-Pacific insurers...

Thomas J. Monaco

Biden Vs. Xi - What Are Businesses Doing?

The case for investing in GBA companies has never looked stronger. Companies are investing in next generation industries and are optimistic about...

Sharmila Whelan