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Dr. Chan: Paradigm Shift In Geopolitics; Uncertainties Cloud 2017
Many political experts, economists and analysts missed their forecasts and predictions in 2016, which was marked by major paradigm shifts in geopolitics.
Against the majority’s expectations, the United Kingdom (UK) voted for Brexit to which financial analysts predicted a bloodbath in global stock markets; the bloodbath did not materialise but, in its place, a rally occurred. In addition, we also witnessed how unprepared US President Barack Obama (Obama) was when Philippine’s newly installed President Rodrigo Duterte (Duterte) decided to “break away” from its long-term ally and lean towards China.
Staging yet another ‘Brexit-like’ moment, America shocked the world when Donald Trump was elected as the 45th US president. Against yet another bout of economists’ theories that a Trump-presidency would crash the US stock markets (some even said as much as 50 percent), US investors sent stocks rocketing to new highs instead.
Having committed to withdraw the US from the Trans-pacific Partnership (TPP), many Chinese have initially ascribed to the notion that Trump was rather accommodative towards China until he answered a congratulatory call from Taiwanese President Tsai Ing-wen. And when China fiercely protested, Trump rebuked them and reiterated that the US need not maintain their long-standing position on the ‘One-China’ policy.
While the Taiwanese president might have thought this to be an opportunity to boost her domestic support, Trump was in fact the one who had exploited Taiwan’s role as a pawn in the China-US relation. In what could possibly be a terrifying outcome for the Taiwanese, we may see the Asian superpower imposing some form of military or economic sanctions on Taiwan if this ongoing saga takes a wrong turn. Growing tensions in the Taiwan Strait is definitely devastating for Singapore.
With only five weeks left before President Obama vacates the White House, would the investigation of Russia-linked interference in the presidential elections escalate into yet another political impasse? We are, currently, faced with uncertainties aplenty when it comes to geopolitical risks!
2017 Fed rate hikes might not happen
On 14 December, the US Federal Open Market Committee raised the federal fund rate by 0.25 percentage points and painted rather hawkish pictures for future hikes. While the US dollar rose to a 13-year high, Hong Kong’s interbank rates also rose significantly as the Hong Kong dollar is pegged to the US dollar. Unlike Singapore’s free float exchange regime, a one-sided rise in US interest rates will only result in the depreciation of the Singapore dollar.
Meanwhile, US investors are still mesmerised with the Donald Trump effect which, coupled with the strengthening US economy, has sent US indices to record highs. Conversely, in the absence of a ‘Trump-like’ effect, Hong Kong’s stock market took a downturn when its interbank rates rose.
Although the Federal Reserve (Fed) now expects three separate hikes in 2017, the scenario may not actually play out. The Fed had originally intended to raise rates as early as in 2013. The-then Federal Chairperson, Ben Bernanke, was “fired” by Obama and was replaced by the rather ‘dovish’ Janet Yellen who became Fed Chairwoman only in February 2014. The first hike under the new central bank governor eventually materialised by the end of 2015 and the initial expectations of “two more hikes” failed to take place.
In his campaign rhetoric, Trump had publicly attacked Yellen for delaying the rate hikes. In other words, should we interpret this as Trump being supportive for a higher interest rate environment? Or was he simply just suggesting that Yellen was being pro-Clinton?
I observed that President-elect Donald Trump has turned relatively silent about ‘firing’ Yellen. I perceive that, unless the US experience any inflationary bubbles, Trump has no reason not to stand in favour of leaving rates accommodative. Ultimately, increasing interest rates would slow down the US economy, which is not what Trump had promised.
China’s property market outlook
Lately, the Chinese Communist Party (CCP) concluded China’s Central Economic Work Conference. The closely watched event is an annual meeting that dictates the country’s economic direction in 2017. After the annual conference, Chinese state media heavily reported that the CCP sees speculation on properties becoming a pressing problem that needed to be addressed. However, in the statement released by the CCP, housing issues were ranked last out of the major resolutions listed.
The top priorities for the CCP include reducing overcapacity and oversupply of inventories, deleveraging, reducing costs for companies, stimulating investments, poverty alleviation, closing up the income gap and raising the social safety net. Evidently, supply-side reform is still the main focus in Chinese Premier Xi JinPing’s economic agenda.
Reducing overcapacity relates to China’s steel and coal industries. Chinese stocks in these two sectors have already rallied significantly this year. In 2017, prospects of these stocks are boosted by more concerted efforts to reduce the overcapacity situation. Meanwhile, China is commonly known as the ‘country of taxes and tariffs’ and these webs of complicated taxes and tariffs need to be addressed to make the costs of doing business in China more transparent.
Oversupply of inventories relates to the polarised state of China’s property market. Its tier 1 and 2 cities experience hot demand and speculation, but on the other hand, its tier 3 and 4 cities are faced with high vacancy rates. Major halts in the development of the lower-tiered cities are evident and some developers are even forced to the brink of bankruptcies.
In the past decade, property prices in major Chinese cities witnessed several massive ebbs and flows. When prices skyrocketed, provincial governments stepped in with extensive cooling measures such as limiting purchases or forbidding locals from buying more than one property. Apart from that, loans for subsequent properties came rather costly, with extremely high lending rates imposed. In this scenario where both demand and supply were curbed, property prices tanked which ultimately led to economic downturns. Such policies were scrapped and since then, Chinese properties broke away from this cyclical trend with prices soaring ever since.
This time round, the CCP has very firmly pointed out that the Chinese government’s aim is to achieve some form of price stability for the property market. In other words, the ‘old’ policy shall no longer apply in 2017. The direction of policies for Chinese properties should be to eliminate short-term speculation while encouraging folks to be landlords and putting their properties to productive use. For those with spare cash to invest, properties should only be purchased as a long-term investment.
Trump’s impact on Singapore still big question mark
Coming back to Singapore, Donald Trump remains the single largest unknown factor for Singapore’s trade-dependent economy. His decision to overhaul the global trade system is detrimental to Singapore’s status as a free port with no or low taxes and tariffs. Should protectionism rear its ugly head under the new US president, Singapore’s trade and other key industries will get badly hit.
