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International relations

China tops forecasters' 2018 fears, and hopes

Asian growth to continue, but rise of identity politics poses risks

Chinese President Xi Jinping delivers a speech at the opening ceremony of the 19th Party Congress at the Great Hall of the People in Beijing.   © Reuters

TOKYO -- Research companies and forecasters presenting their annual what-to-look-out-for lists for 2018 have very much focused on China, with one forecaster calling the country "the world's biggest risk" this year.

That forecaster is Ian Bremmer, president of the Eurasia Group. "Xi [Jinping] has now consolidated enough domestic power to redefine China's external environment and set new rules within it," after the 19th Party Congress last October, he noted. Coupled with the power vacuum created by the U.S. and its America First policy, the result is that "China is now setting international standards with less resistance than ever before."

Bremmer noted that China is "writing checks and creating a global architecture while others are thinking locally or bilaterally."

"The global business environment will have to adapt to a whole new set of rules, standards, and practices pushed by China," Bremmer said, while there will be pushback against China's assertiveness which "could lead to a lot more friction in the South China Sea, over North Korea, and in U.S.-Chinese trade relations."

He added: "There is now a viable alternative [to Western liberal democracies]. For most of the West, China is not an appealing substitute. But for most everybody else, it is a plausible alternative. And with Xi ready and willing to offer that alternative and extend China's influence, that's the world's biggest risk this year."

China cuts off all fuel and food shipments to North Korea, which agrees to suspend its nuclear development program but not give up its current weapons arsenal

Byron Wien, vice president of Blackstone

While Bremmer is on the pessimistic side, Byron Wien, private equity firm Blackstone's vice president, noted that China could help global stability. One of his "surprises" for 2018 -- an event that the average investor would think unlikely, but which Wien believes has a better than 50% likelihood of happening -- is for China to finally decide that a nuclear capability in North Korea is not tolerable, even though the rogue state is a buffer against democratic South Korea.

"China cuts off all fuel and food shipments to North Korea, which agrees to suspend its nuclear development program but not give up its current weapons arsenal," the influential Wall Street forecaster said.

On the economic front, Wien sees much slower growth for China in 2018. Xi "focuses on China's credit problems and decides to limit business borrowing even if it means slowing the economy down and creating fewer jobs," Wien said. "Real GDP growth drops to 5.5% ... Xi proclaims this move will ensure the sustainability of China's growth over the long term."

Nariman Behravesh, chief economist at IHS Markit, agrees. The structural problems the country faces, namely excess industrial capacity, debt overhang and a housing glut, along with the government's policy response to these problems, "will be a drag on the economy, in general, and investment demand, in particular," he said. "A moderate weakening in China's growth momentum in 2018 thus appears to be in the cards. IHS Markit predicts that China's growth rate will diminish from 6.8% in 2017 to 6.5% in 2018."

As for Asia as a whole, Goldman Sachs predicts that the region will continue to post above-trend growth this year. "Momentum remains strong and financial conditions generally easy as 2018 gets underway -- supportive conditions for near-term growth," economists at the investment bank noted.

"However, we believe regional export growth is unlikely to improve much further, and policy tightening in China should put a cap on the (still strong) pace of regional activity this year. Therefore, our expectation is for regional growth to remain roughly steady at an above-trend pace."

Our expectation is for [Asia's] growth to remain roughly steady at an above-trend pace

Goldman Sachs

But while the economy might see a continuation of solid growth, the region, according to Eurasia's Bremmer, increasingly faces risks from identity politics. "Identity politics in Europe and the U.S. has taken center stage in recent years, and we'll see more evidence of a similar phenomenon in Southeast Asia and on the Indian subcontinent in 2018," he said. "This trend threatens the future of these increasingly prosperous regions, creating unexpected challenges for economic planners and foreign investors."

For Bremmer, Indonesia and Malaysia are two countries that stand to bear the full brunt of identity politics in the form of Islamism. In Indonesia, where the country is gearing up towards regional elections in 2018 and presidential elections in 2019, "fears that the country's majority Muslim population are victims of economic and political injustice empower Islamist groups." In Malaysia, political Islam is "also becoming more prominent" as the Prime Minister Najib Razak "continues to court the Muslim Malay vote to win re-election" this year.

Identity politics in Europe and the U.S. has taken center stage in recent years, and we'll see more evidence of a similar phenomenon in Southeast Asia and on the Indian sub-continent

Ian Bremmer, Eurasia Group

India is also at risk. "Prime Minister Narendra Modi and the ruling Bharatiya Janata Party (BJP) will try to use Hindu nationalist rhetoric and policies to win and retain support from Indians angry over the 'appeasement' of Muslim and other minority groups," Bremmer said.

For India, "the danger is that Modi's use of nationalism to consolidate his support ahead of the 2019 election could give cover to radicalized elements of society that want to target Muslims and lower caste Hindus, leading to risks of localized instability."

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