AsiaIn this week’s letter, we examine China and India – the world’s two most populous economies. We first take stock of developments in monetary policy, noting China’s continued inclination toward more easing while India keeps policy tight to contain inflation. We also note, however, still weak credit demand in China despite recent easing moves, and strong loan growth in India despite recent tightening moves. We look next at equity market performance in these two economies, noting the divergence between investor pessimism about China and continued optimism regarding India. Next, we assess longer-term demographic issues, highlighting China’s challenges with a rapidly aging population, in stark contrast to India’s relative youth. We end this week’s discussion with a shift to the advanced Asian economies of Taiwan and South Korea, noting persistent manufacturing weakness in the former. And we give a nod to the significance of semiconductors in these economies’ exports, acknowledging, in particular, their recent rebound in South Korea.
Monetary policy in China and India The People’s Bank of China (PBoC) cut the one-year medium-term lending facility (MLF) rate by 45 bps over 2022 and 2023 (chart 1) to support a struggling Chinese economy. The MLF rate cuts in turn dragged on the one-year and five-year loan prime rates (LPR), which serve as reference rates in the credit market. More recently, the PBoC announced that it will cut the reserve requirement ratio (RRR) for banks by 50 bps, effective 5 February. The central bank’s governor said the move will unleash about 1 trillion yuan ($140 billion US dollars) of liquidity into China’s financial system. The PBoC has already enacted numerous RRR cuts in recent years, in a bid to boost growth by easing monetary and credit conditions. It remains to be seen, however, if the latest easing moves can alleviate the challenges China currently faces, given the structural roots of China’s economic problems.
In contrast, the Reserve Bank of India (RBI) has pursued policy tightening over recent years, having raised policy rates by 250 bps to combat inflation. As a result, India’s policy repo rate and marginal standing facility rate have been lifted to late-2018 levels, of 6.5% and 6.75% respectively. Also, the standing deposit facility rate was lifted to 6.25%. India, like many other emerging Asia economies, has experienced price pressures from food and energy costs, prompting the RBI to raise interest rates.
