Huawei Row Shows Geopolitics’ Effect on Near-Term Asian Economic Outlook

Asian economies are facing some serious economic headwinds amid growing political risk, possibly exacerbated by the recent arrest of a top executive of Chinese IT giant Huawei by Canadian authorities on behalf of the US.

The arrest of chief financial officer Meng Wangzhou and Chinese retaliation by detaining Canadian citizens are just symptoms of a larger political fallout between the US and China that may well contribute to a larger freeze in trade and spill over into other economic areas.

The escalating tensions in the past few weeks seem to have all but derailed the otherwise short-lived celebration over the 90-day truce in the US-China trade war signed between Chinese president Xi Jinping and US President Donald Trump on Dec.1.

The Chinese state-run hard-line Global Times said in an op-ed published on Dec. 16 that the incident has triggered a “wave of nationalist sentiment in China, which might turn into domestic political pressure if things do not turn well for Meng and Huawei.”

This ‘nationalist sentiment’ is nothing to take lightly. In 2012, violence erupted in major cities from Guangzhou to Harbin – cheered on by Global Times -- over ownership of the Senkaku/Diaoyu Islands, with protesters vandalizing shops selling Japanese goods, smashing of Japanese cars, rocks hurled at Ramen shops. Weeks of other protests were allowed to go ahead by authorities if they weren’t actually condoned.

The strongly-worded Global Times piece lambasted what it called the US’s “long-arm jurisdiction” and “unilateral hegemony” because of Washington’s “superpower status” aimed at curbing Huawei’s leadership position in cutting-edge 5G network technology.

Japan, Australia and New Zealand have already restricted Huawei from participating in the building of 5G networks. The US is said to be pressuring the European nations to exclude Huawei from its auction for 5G technology slated for next year.

Even India might eventually be forced to address the security concerns the Chinese firm could potentially pose to the country given Huawei’s strong presence there (it hires 4000 engineers in Bangalore), as veteran journalist Nayan Chanda notes in a piece in India’s newspaper Times of India.

It remains to be seen how the Huawei row affects the relationship between India and China, which do not often see eye-to-eye, not least on matters of security and geopolitics.

Indeed, the World Trade Organization (WTO) warned in a report as early as in September that escalating trade tensions could potentially disrupt the region’s supply chains as multinational manufacturers in China look to other countries not subject to the stiff tariffs US President Donald Trump is threatening against Beijing.

That could have important implications on China’s ongoing efforts to steer its economy away from an investment-led model to the one led by consumption, which relies heavily on import content.

Such heightened volatility in the financial markets could lead to sudden shifts in expectations amongst global investors, which could lead to capital outflows from the Asian region, especially as developed economies such as the US raise interest rates.

And after growing at a somewhat robust pace in the past two years, the growing protectionism is seen hampering overall trade in the region, as lower Chinese exports means it would be buying less from other economies in the Asian region.

China’s export growth already slowed down in September on worries over the trade war. It could eventually take a toll on investment growth as well on sentiment in the financial markets.

“Consumer sentiment and domestic demand remain solid but may eventually succumb to external uncertainties and weaker asset markets,” said Asian Development Bank in a report issued earlier this month.

While the risks of higher interest rates in the US have somewhat diminished because the US economy is not showing signs of overheating, the US growth has still exceeded expectations, ADB said.

The good news is that oil prices continue to drop, which significantly reduces pressure on the balance of payments of the oil-importing countries such as India, which is currently the world’s fastest growing large economy.

But even in India, political risks have also risen somewhat, after Prime Minister Narendra Modi’s BJP government suffered a rousing defeat at the hands of Congress in state elections earlier this month, seemingly rejuvenating Rahul Gandhi’s so-far lackluster political career.

Indian voters, especially the poorer sections of the society, seemed to be wanting to hold the Modi government accountable for the slowdown in the Indian economy, poor jobs outlook, and for major policy blunders, most notably the demonetization of large-denomination currency notes two years ago.

Moreover, the sudden resignation of Urjit Patel as the governor of the Reserve Bank of India (RBI) last month has brought into open the somewhat fractious relationship between Modi’s government and the country’s central bank.

The Indian government has immediately appointed a bureaucrat who was in charge of implementing the demonetization plan, Shaktikanta Das, as India’s new central banker, the third to hold the post in the near term.

He is expected to bring some stability to the central bank but sentiment continues to be nervous with the Indian currency continuing its downward slide, having lost nearly 11 percent so far this year.

As Modi’s government goes all out to get reelected in next year’s elections amid a strong anti-incumbency mood, more surprises and some bumps are seen for the India’s economy, especially in the financial markets, analysts believe.

Growing populism around the world will likely put big-picture geopolitical risk at the heart and center and the recent events, as indicated by the Huawei row, show that politics continue to drive the region’s economic outlook.

The recent events show that China’s authoritarian, one-party approach to governance, once lauded for its stability by the business community, has not escaped the volatility and rise of populism around the world, including in the US, and its implications on trade and economics.

It’s quite clear that geopolitical uncertainty will continue to create some volatility in Asia, particular in the region’s two largest economies, on the near-term horizon.