The political world has been looking west for what seems like months but although some uncertainty remains, it’s clear that the ramifications of the U.S. election will be global.

In this edition of Asian Aspect, we consider the U.S. election's impacts on the Asia-Pacific region and assess the wider economic environment for investors. Does the emerging election outcome mean that peak uncertainty has now passed? How will Biden’s experience in foreign policy shape the new administration? Will the Regional Comprehensive Economic Partnership (RCEP) shore up trade in the face of de-globalization pressures? And is China really unstoppable?

Has peak uncertainty passed?

Joe Biden is poised to be the 46th President of the United States, notwithstanding any substantive court challenges. Any remaining uncertainty is centered around which party will gain control of the Senate. Although a Biden clean sweep now seems unlikely, it still presents an upside risk to global growth. To put this into context, we estimate that Democratic control of the Senate could expand the U.S. fiscal position by $3.3tn by end-2024 (approx.15% GDP), potentially pushing up on U.S. GDP by 4.5% by 2022 versus the current baseline. As a rough guide to the potential boost across APAC, we think that Chinese GDP could be lifted by 0.5% to 1%.

In contrast, a Republican-controlled Senate may only pass a package of $0.5-1tn. A stimulus of this scale would moderate — not eliminate — the tightening in fiscal policy scheduled to take hold as large parts of the CARES act expire. This would imply a small headwind to global growth.

On foreign policy, President Biden would be free to deploy his considerable experience in this area. He is widely expected to operate his administration with more clarity and policy stability, potentially reducing global economic policy uncertainty, which had risen notably under President Trump.

What does this mean for trade policy? We expect Biden to strike a more strategic, multilateral approach than President Trump has, notably improving relations between the U.S. and European allies. However, how a Biden administration will engage with China is not yet clear, and the second Covid-19 wave in the U.S. may delay any partial rapprochement, keeping domestic issues at the top of the agenda. Biden seems unlikely to rapidly reduce trade barriers with China, given the domestic political backdrop, and may opt instead for a strategic review of the relationship, which could rip up or recast the Phase 1 trade deal (Chart 2). Either option should nonetheless help reduce headline volatility and fears of de-globalization, potentially providing a small boost to investment across APAC as global supply chains seem less at risk.

The RCEP: pressing ahead with deepening trade

The Regional Comprehensive Economic Partnership (RCEP) was signed and sealed on November 15, combining the trading agreements of 15 Asian economies — including China, and covering about a third of the global population – into a single multilateral pact. The RCEP aims to lower some tariff and non-tariff barriers within the region over the next 20 years.

Perhaps of most significance is the harmonization of the "rules of origin," reducing frictions in regional supply chains (currently some goods face tariffs even under a free trade agreement if their components are made in other countries). The RCEP is also the first free trade deal between China, Japan and South Korea, the major manufacturing powerhouses. The RCEP has provided a platform for these three countries to succeed in striking a multilateral deal, where a deal negotiated on individual basis might not have been possible. The Peterson Institute estimate that RCEP will provide a small boost to GDP in the long run, perhaps adding around 0.2% to economies on average. But some countries may benefit by more, with South Korea and Japan generally thought to be best placed to benefit from this deal.

India is the notable absentee, refusing to sign the RCEP, stating concerns about a deluge of Chinese imports. We think that India could be well placed to benefit from digitization trends – however, the failure to integrate into the RCEP trading bloc could turn out to be a missed opportunity to diversify its engines of growth in a post-pandemic world.

Indian Prime Minister, Narendra Modi was quick to congratulate Joe Biden and Kamala Harris. India appears to be positioning itself as an ally within the U.S. sphere of influence in the Asian region, and as a counter to China.

On the macro side, while India’s festive month should provide a much-needed boost to consumption activity, there is also the possibility that this could lead to a post-festivity surge in Covid-19 cases. We think the bar for tightening restrictions in India is very high and do not foresee a lockdown-led disruption in the coming months, but, as illustrated in the U.S. and Eurozone, coronavirus has a habit of forcing policy reversals.

Meanwhile, inflation continues to constrain the Reserve Bank of India (RBI), with localized lockdowns contributing to elevated food price inflation. October Consumer Prices Index (CPI) accelerated to 7.6% y/y, while core inflation also rose to 5.1% y/y. The accelerating trend in CPI reinforces our view that the RBI will not be easing in the coming two quarters.

Elsewhere in the region, Malaysia had one of the strongest rebounds in the third quarter, with private consumption increasing 22% q/q, helping to drive GDP to only 1.8% below its pre-Covid level. In Indonesia, government expenditure and private consumption recovery accounted for a bulk of the recovery in the third quarter. On average, developing Asian economies are about 4-5% below their first-quarter level of GDP.

For emerging markets (EMs), the important question for next year is how much government support they can keep in place. With the U.S. stimulus at risk of disappointing markets and emerging markets having to wait for a year longer than developed markets for a vaccine, our view is that EMs may need to do more.

Japan: an eye on the Olympics

Regarding Covid-19, the third localized wave of the virus in Japan may be a risk for domestic demand, but cases remain low relative to Europe and the U.S., and the government plans to tackle the pandemic through increased testing, tracking, and localized measures. Remaining restrictions, such as international travel bans, are likely to be steadily eased over the course of next year as the government continues to plan for the rescheduled Tokyo Olympics next summer, starting with plans to ease Japan’s entry bans for athletes selectively as long as they provide negative test results and written itineraries. The government appears very determined to make the Olympics happen, but obstacles to hosting must be overcome. Developed markets, Japan and China may at least have inoculated a large proportion of their populations, but even for these countries herd immunity will be likely to remain out of reach.

Meanwhile, Japan’s third-quarter GDP was much stronger than expected at 21.4% qq saar, driven by a sharp recovery in consumption and net trade. The export recovery was driven mainly by trade with China and US. In contrast, capex and housing investment fell sharply, by 12.8% and 28.1% qq saar respectively as business sentiment remained subdued across most sectors except technology investment, in line with Prime Minster Suga’s focus on digitization.

China: unstoppable? To middle-advanced economy status, and beyond.

The authorities continue to plan for the long-term, setting another target to double GDP again, this time by 2035. This is a clear commitment to keep China on the path to achieving advanced economy status and is at least a less aggressive target than previously set.

Big questions remain as to whether China really is unstoppable (either at risk of succumbing to pressure from abroad or reflecting domestic factors), and this latest target continues to incentivize quantity rather than quality, potentially making long-run aims harder to deliver.

In the near-term, the Chinese economy looks very robust, and is likely to come out of the pandemic relatively unscathed (although still with slightly lower potential growth). The October data remained robust, suggesting that industry continues to defy gravity. Industrial production came in at +6.9% yoy, remaining above pre-Covid trends. Nominal retail sales rose further in y/y space, up 1pp to 4.3% y/y, but were slightly below consensus and more lackluster when estimated in m/m growth. There may however been some rotation towards services, the Caixin services PMI rose to 56.8, returning close to its recent 10 year highs. Encouragingly, the employment sub-index suggests further recovery in the labor market, rising 1pt on the month.

Finally, President Trump may yet inflict further damage on China before he departs, with the executive order banning investment in 31 Chinese companies deemed to have links with the Chinese military, being the latest example. But China should be able to absorb any final flailing, hopeful that a new administration should at least be more predictable, even if it does not necessarily unwind the actions of Trump.

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