Update Country Report Maldives 27 Jul 2020

The US consulate-general in the Chinese city of Chengdu closed on July 27th, following the shuttering of its Chinese counterpart in the US city of Houston, in the latest escalation of tensions between the US and China. Friction in the bilateral relationship is again upsetting financial markets as the rivalry becomes almost all-encompassing. Alongside trade, fronts for competition have emerged in areas including finance, geopolitics, human rights, ideology and technology.

One area in which the US and China have fortunately yet to clash directly is in the military realm. However, rhetoric over the issue of the South China Sea has become more heated, with the US having clarified its policy differences with China over the disputed maritime territories in the region. This followed several clashes between China and rival claimants, which have encouraged the perception that China is taking advantage of the coronavirus (Covid-19) pandemic to press its claims more forcibly.

A bottom line for US-China relations?

There have not been reported close encounters between US and Chinese defence assets, suggesting that both sides want to prevent a military clash. The US defence secretary, Mark Esper, recently expressed his hope to visit China before the end of the year to further the goal of improving "crisis communication"-a suggestion that China received positively. We interpret this as indicating that the two sides would like to draw a "bottom line" under their relationship to safeguard against military incidents; less positively, it may suggest that they view heightened conflict in other areas of the relationship as almost inevitable.

Nevertheless, the risk of a clash will remain, especially during a US presidential election cycle. The most prominent recent incidents in US-China military relations-a clash between a Chinese fighter jet and a US surveillance plane in April 2001 and China's seizure of a US underwater drone in December 2016-occurred soon after the election of a new US president. The possibility of a naval clash in the South China Sea is probably the area of greatest concern; the Chinese government maintains an unbending attitude, and the recent policy shift in the US may result in that country feeling obliged to step up its support for countries and allies involved in disputes with China.

Comparisons with the Cold War still seem stretched at this stage; the US and China retain high levels of economic interdependence that would probably be impossible to unravel. Military competition, in the form of an arms race or support for rival participants in proxy wars, seems unlikely. Nevertheless, the direction of the relationship is troubling, and we expect further flashpoints to emerge in the coming months, with China set to feature heavily in the US presidential campaign. If, as we expect, Joe Biden is elected to the US presidency in November, bilateral ties will continue to worsen, but at a slower pace than under the current US administration.

Coronavirus developments are mixed in South-east Asia

In the week beginning July 19th, 19 economies in Asia recorded larger increases in coronavirus infection than in the previous seven-day period, up from 12 economies the previous week. The largest net increases were reported by India, Bangladesh, the Philippines and Indonesia.

Outbreaks continued to expand rapidly in Indonesia and the Philippines. This prompted the latter government to warn of a potential tightening of containment measures in the capital, Manila, and the surrounding region should the trend continue, suggesting a downside risk to our core forecast. We currently believe that the government will only shut down the worst-affected districts, rather than the entire capital, in order to minimise economic damage.

Meanwhile, the epidemic curve in Singapore-another major economy in South-east Asia-returned to an upward trend, after the government had temporarily stabilised the situation with a "circuit-breaker" lockdown from April 7th to June 1st; 481 new infections were recorded on July 26th alone, mainly in foreign-worker dormitories. This will probably lead to a prolonged "phase two" of opening up the economy, with social distancing measures remaining strictly enforced. It is also likely to prevent a planned partial reopening of the border with Malaysia from progressing beyond limited home visits for the next few months.

The rest of South-east Asia has managed to avoid the worst of the pandemic. Brunei, Cambodia, Laos, Myanmar, Thailand and Vietnam have suffered relatively small caseloads and have therefore been able to avert more stringent lockdowns. Malaysia has also been able to slow transmission with its movement control order. However, these countries are relatively dependent on goods and services exports, meaning that their economies will still be hit by the decline in global demand and international travel bans in 2020. We forecast that Thailand will suffer one of the largest contractions in real GDP this year across Asia, as tourism accounted for a large share of its economy before the pandemic. This highlights that economic performance does not correlate directly with the scale of domestic outbreaks.

Meanwhile, three provinces in China recorded local outbreaks of the coronavirus during July 19th-25th: Xinjiang, in the north-west, and Liaoning and Jilin, in the north-east. The authorities in Liaoning discovered a cluster that had spread from a seafood processing plant. The recent outbreak in the national capital, Beijing, is also thought to have a link with seafood, with swabs taken from imported salmon at a wholesale food market testing positive for the coronavirus. This has prompted the authorities to increase testing of chilled and frozen imported foodstuffs. Many ports have subsequently reached capacity, incurring additional costs and the need to reroute shipments for some importers. This could contribute to rising food prices.

The week ahead

The week will be capped by China's release on July 31st of purchasing managers' index data for July, with other countries set to follow during the subsequent week. We expect the data to show that the recovery signalled in China's GDP figure for the April-June quarter will be carried into the third quarter of the year, with US-China tensions unlikely to have upset sentiment significantly. The bigger concern for Chinese economic policymakers will be the emergence of new coronavirus clusters within the country. South Korea will also be releasing several survey indicators this week, including consumer and business sentiment, following its better than expected GDP figures for the second quarter.

Two of Asia's more trade-dependent economies, Hong Kong and Taiwan, will publish their GDP figures for the second quarter on July 29th and July 31st respectively. We expect Hong Kong to post firmly negative growth in year-on-year terms. This will be largely the result of a contraction in household spending growth rather than the contribution of net trade to GDP, although the collapse in tourism will remain a significant drag on overall economic activity. The Economist Intelligence Unit similarly expects Taiwan's real GDP to have fallen into contraction in April-June, owing primarily to poor trade performance over the same period. Nevertheless, enduring external demand for Taiwanese electronics-underpinned by the global shift to remote working arrangements-should put something of a floor under trade prospects later this year. These dynamics, along with government stimulus efforts aimed at reviving consumption, should allow for a firming in Taiwanese economy activity by late 2020.