Asia Daily Update

North Asia:

** China: Stronger than expected bank lending in February
** China: Deposit insurance scheme to be introduced by end H1

CHINA: Total social financing for February was released yesterday and showed stronger than expected new CNY loans. Total social financing for February was CNY1.35tn down from CNY2.05tn the month prior but above expectations of CNY 1.0tn. New CNY loans (i.e. fresh bank lending; a component of total social financing) was CNY 1.02 tn, down from CNY1.47tn in January but above expectations of CNY0.75 tn. Bank lending is always strongest at the beginning of the year as banks get fresh lending quotas. At the margin we can conclude that banks are lending more than expected. This might reflect the impact of interest rate cuts, the RRR cut and official encouragement.

PBoC Gov Zhou held a news conference yesterday at the NPC. At the conference he said that deposit insurance scheme will be launched in the first half of 2015 (i.e. over the next three months). The central bank will also remove the ceiling on deposit rates this year.

Our view: These long awaited reforms are necessary for true interest rate deregulation, which ultimately are necessary for true CNY liberalisation. In our view, the central bank needs to establish an overnight interest rate target and remove regulations on interest rates of other tenors, both on the lending and deposit side. This would bring China in line with advanced economies elsewhere. The significance of such reforms is that the PBoC needs an interest rate tool to indirectly manage the CNY once the currency is floated. The deposit insurance scheme is necessary to reduce the risk to the banking system should an individual bank fail after offering excessively high deposit rates.


South/Southeast Asia:

** India: Positive signs from January IP with capital goods production firmer
** Singapore: USD-SGD’s dip sees the SGD NEER valuation narrowed to -1.2% vs mid-point
** Malaysia: BNM Deputy Governor Singh says ringgit peg not on horizon, as USD-MYR approaches 3.80

INDIA: It was a mixed data set yesterday. January industrial production gained 2.6% y/y (market: 0.7%) from 1.7% previously. Manufacturing production (76% of IP) expanded above 3% for the 3rd consecutive month at 3.3%. More encouragingly, capital goods production picked up to 12.8% y/y from 5.3% previously and is up 5.7% in the fiscal year-to-date (FY2014/15) vs -0.8% for the same period last year. This is unambiguously a positive sign and a continued recovery will be indicative of improved investor sentiment.

- February CPI inflation rose 5.4% y/y (market: 5.2%) from 5.1% previously. This is still within RBI’s expectations of a benign reading in the 1st of the fiscal year before edging back towards the sub-6% area in the 2nd half of the fiscal year. A string of firmer than expected reading may dent expectations of aggressive RBI cuts. However, our bias is for another 75bp cuts to 6.75% by year-end on CPI to remain well behaved and a relatively stable USD-INR which should provide greater policy flexibility for RBI on the domestic front. For USD-INR, it eased back yesterday to close around 62.50 from 62.80 following the general squeeze on USD longs. Overall, consolidation is seen within the wider 61-63 range.

SINGAPORE: We get January retail sales today with the headline expected to post a modest gain of 0.6% y/y from 2.6% previously. Excluding autos, retail sales are expected to remain weak and contract for the 3rd consecutive month, around -2%. Overall, it should not have much impact on USD-SGD. A cooling property market and increased job losses in the financial market may hamper retail sentiment going forward.

- For USD-SGD, it eased back to 1.3820 yesterday from the 1.3890 level. For the SGD NEER, we estimate the slide in USD-SGD has seen the valuation pared back to -1.2% vs the mid-point for USD-SGD at 1.3810, USD-MYR at 3.6950, and USD-CNY at 6.2630. This is compared to an average of -1.9% on Monday-Tuesday when USD-SGD climbed to the 1.3900 mark. For the week, it is still averaging around -1.5%.

MALAYSIA: January industrial production released yesterday came in within expectations at 7% y/y form 7.4% previously. This year’s growth outlook has been pared back to the low 4% but should not be a major concern. Instead, the key issues are 1) a more dovish sounding BNM; 2) lingering concerns over the debt and accounts of the state run 1MDB entity; and 3) FX stability. With USD-MYR approaching the 1997 Asia Financial Crisis peg level of 3.80, BNM was forced to come up with some comments yesterday. BNM Deputy Governor Sukhdave Singh said yesterday that a ringgit peg is not on the horizon. He added that “once all external uncertainties related to the US rate normalization and policy divergence among major economies are settled, ringgit will return to where it should be.” Indirectly referring to the debt concerns of 1MDB, he said “central bank stress tests show there won’t be contagion impact to the wider financial system or knock-on effect on the real economy should any single large borrower fail”. For USD-MYR, it held within a narrow range yesterday between 3.6750-3.7000 but a supportive tone is still seen near term.