Latest developments in India Japan and China

Rather than looking at one key market theme for the day, we thought it interesting to mention all three topics surrounding India, Japan and China today. India’s rise in global economic significance is being met with deep political and structural issues. Those hoping for Indian growth to pick up some Chinese slack in 2012 have been greatly disappointed. Indian Prime Minister Manmohan Singh is facing even greater pressure from his domestic political rivals to curtail foreign direct investment in key markets, with many domestic politicians fearing backlash from their key constituents.

Singh’s former party will push for a vote of no confidence when parliament meets in the coming days. Supermarkets are the key grievance when it comes to foreign investment. The political tussle highlights the challenges India faces, not only with growth but the structure of its economy. It is unlikely to offset any Chinese slowdown in the coming years. Singh’s government formation is complex, he is reliant upon a coalition of lawmakers to pass through reforms. It’s not just supermarkets, India needs to attract foreign companies with the intellectual knowledge to help broaden and even out its economic growth model. These companies need returns. Foreign direct investment is becoming an increasingly complex issue in India.

This brings us to China. Even though China does not have the political impediments facing Singh, the flow of foreign direct investment into its economy continues to decline.  Investment from outsiders fell for an 11^th month in the past year as a territorial dispute with Japan weighed on trade. Investment declined 0.2% in October despite a broad improvement in the economy and higher house prices which we discussed yesterday. Foreign direct inflows were 3.5% lower to US$91.7bn for the first ten months of this calendar year.

Last month we discussed the importance of Japanese foreign direct investment into China (click here for the report) and noted that China will be very aware of this when acting out its diplomatic position relating to territorial disputes over the Senkaku/Diaoyu Islands. Japan is the second largest foreign investor into China, slightly behind the United States. The initial impact of the trade war is starting to show through today’s official data and the actual number could be worse than what is reported. But Japan also needs Chinese growth exposure and the Bank of Japan’s decision to refrain from more stimulus today is seen as mainly a temporary measure.

The BOJ’s asset fund and credit lending facilities were steady – in line with market estimates. The yen continues to sell off, with the US dollar last buying 81.26. All eyes are now on the December 16 election where opposition leader Shinzo Abe – the leading contender – has called for unlimited easing and an increase in the BOJ’s inflation goal to as much as 3% from 1%. The bottom line is China and Japan need each other more than ever to realise their targets, while India needs the rest of the world to invest into its domestic economy while appeasing domestic political jockeying. 2013 is shaping up to be an interesting year in Asian markets.