Asian Economies Weaken, Stimulus Speculations Intensify

Several separate economic indicators suggest Asian economies are seeing accelerating weakness, fueling speculation that more Asian banks will begin monetary stimulus programs.

Manufacturing and service growth in China saw sluggish growth after falling in February, with the Purchasing Managers’ Index rising to 50.1 in March from 49.9 in the prior month, indicating a slight expansion.

Several separate economic indicators suggest Asian economies are seeing accelerating weakness, fueling speculation that more Asian banks will begin monetary stimulus programs.

Manufacturing and service growth in China saw sluggish growth after falling in February, with the Purchasing Managers’ Index rising to 50.1 in March from 49.9 in the prior month, indicating a slight expansion.

Elsewhere, the Bank of Japan saw a fall in corporate investment, and South Korea has seen the lowest level of inflation in over 15 years, while exports have fallen by 4.2% in March to a two-year low after falling 3.3% in February. The increasing fall in Korean exports has caught many economists by surprise, after the Asian country signed free-trade agreements in recent years with the European Union and the United States to bolster exports. In China, economic growth is likely to slow to below the government’s target of 7% for 2015, as real estate prices fall at an accelerated rate and inflation declines. Consumer prices grew at 0.8% in January, the lowest rate in five years. Real estate prices fell in most urban areas, with 66 of 70 cities showing a fall in new home prices. New land purchases by developers also slid, with a 31.7% fall on a year-over-year basis. Real estate accounts for about 15% of China’s economy.

PBOC Hints at Stimulus

Earlier in the week, People’s Bank of China Governor Zhou Xiaochuan hinted that Asia’s largest economy was on the brink of a liquidity trap, as declining inflation on falling energy costs could lead to deflation—and require monetary actions to counter the trend.

“Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not,” he said earlier this week at a forum in Hainan, adding that the disinflation trend was a “little too quick” and in need of a response from the bank.

The PBOC has already attempted to stimulate the economy and drive interest rates higher with two interest rate cuts in the last five months, but Zhou added that more ways of encouraging inflation, including less capital controls, could stimulate the country’s currency and bring inflation rates higher.

In previous years, criticism of China centered on keeping its currency exchange rates artificially low to boost exports.

Japan’s QE Bonanza

The extreme size and rate of Japanese quantitative easing program has fueled speculations that a similar monetary expansion program could soon come to South Korea and China, after the PBOC and the Bank of Korea cut interest rates and hinted at additional tools to combat disinflationary trends. Japan’s current QE program, which is set to add about $720 billion in liquidity by aggressive asset purchasing programs, has caused equities to rise and the Japanese yen to fall. Some analysts fret that a similar program in China, which has seen a large appreciation in stock prices amidst high retail investor demand, could cause unsustainable asset price growth.