Asia Daily Update

North Asia
** China: The PBoC announces measures to boost ailing property market
** Hong Kong: Protests set to last for a long time

CHINA:

China has a public holiday today for National Day.

The PMI for September was released and held steady at 51.1, unchanged from the month prior.

The PBoC announced measures yesterday aimed at boosting the ailing property market and relieving its participants from pain. The measures were broad-based addressing weakness in the property market from several angles.

First and foremost, the PBoC has coordinated with banks to lower their mortgage rates for first home buyers, with a discount of 30% on prevailing mortgage rates. This basically takes a 5-year mortgage from 6.55% down to 4.59%, or a near 200bp in easing. Moreover, the definition of a first home buyer has been broadened to include home owners who have fully paid off their first mortgage. Finally, the down payment for first home buyers will be harmonised at 30% (lowered if necessary), while the down payment for a second property will remain at 60%.

The PBoC will also takes steps to improving the ability of banks to lend by encouraging the development of a mortgage-backed security market. Developers will also be able to sells bonds subject to approval into the interbank bond market. The ongoing trial into real estate investment trusts will continue.

Finally, the PBoC will aim to lift construction of housing for the poor by increasing the loan tenure for shantytown reconstruction projects to 25 years from 15 years previously.

Our view: These steps will help to soften the downward adjustment in the property construction industry rather than halt it. At the end of the day, there is a glut of apartments either already on the market, under construction or already sold but unoccupied. It will take years for the glut to be absorbed. Moreover the lower cost of mortgages for first home buyers will merely lower affordability of housing from extremely unaffordable to highly unaffordable. We estimate that the monthly mortgage payments on a 25 year mortgage with a five-year fixed rate will drop by around 17%.

HONG KONG: Pro-democracy protests continue today, China’s National Day. Hong Kong markets will be closed for the holiday. The protests are the worst in Hong Kong since China resumed its rule of the former British colony in 1997. The police force has backed from aggressive measures to cope with the clout. As we wrote yesterday, the risk of miscalculation by the authorities in handling the protestors is high. The possibility remains that unrest in Hong Kong could eventually lead to unrest in mainland China, although this seems remote at the moment in the near term.

Chief Executive Leung has admitted the protests would not end soon. He urged the organisers to call off the protests, suggesting that the movement was getting "out of control" and affecting emergency services.

South/Southeast Asia
** India: RBI kept rates unchanged, warning on upside inflation risks in medium term
** Indonesia: Outgoing president plans to issue a decree to overturn the law barring direct local elections

INDIA: The RBI kept its benchmark repo rate unchanged at 8% as the market widely expected. The RBI kept its CPI inflation targets unchanged at 8% by January 2015 and 6% by January 2016. However, RBI Governor Rajan warned about the upside risks in achieving the 2016 inflation target, citing uncertainties in food and energy prices. Both CPI and WPI inflation have eased to below 8% and 4% respectively in August, well in line with the RBI’s forecast. Rajan also told the press that INR has been strong compared to global currencies and the RBI has built FX reserves while maintaining exchange rate stability. The FX reserves stood at USD 315.6bn as of September 19. Overall his tone is neutral and we expect the RBI to focus on anchoring medium-term inflation expectations and maintaining exchange rate stability.

INDONESIA: Outgoing President Susilo Bambang Yudhoyono (SBY) said last night that he plans to issue an emergency decree to restore direct local elections. However the bid to change the law has to go through opposition which controls 52% of the seats in the country’s legislature, with former bitter presidential candidate General Prabowo Subianto as effective leader of the opposition. According to Indonesian law, the president would need to declare a state of emergency to reverse the law and the decree would remain in effect until lawmakers can vote on it. Although President SBY faces steep opposition in the legal challenge, it is nonetheless a positive development for restoring democracy in local elections.