Asia Daily Update

North Asia:
** China: IMF deems CNY as “no longer undervalued”; urges greater CNY flexibility
** South Korea: BoK Governor sees economic challenges given weak exports

CHINA: In the latest Article IV on the Chinese economy released yesterday, IMF revised its assessment of the valuation of CNY to “no longer undervalued” from “undervalued by 5-10%” back in 2013. According to IMF’s CNY REER index, it has appreciated nearly 64% since end-2004. Our estimate for the CNY NEER is that it has appreciated by 43% since end-2004. IMF also noted that
1) China’s external position is “still-too-strong” despite the change in currency valuation. It urged for policymakers to push ahead with reforms so as to reduce excess savings and reduce the imbalance;
2) China should adopt a flexible exchange rate over the next 2-3 years to prevent the CNY from deviating away from its equilibrium position; and
3) CNY’s inclusion in the SDR basket is only a matter of time, without giving any specific time frame. The SDR basket is reviewed in five-year intervals, with the upcoming review expected to be completed in October.

This was alluded to by Christine Lagarde a few weeks back that CNY’s inclusion in the SDR basket is a matter of when not if. IMF also noted earlier that in order for CNY to be included in the SDR, one criteria is for it to be “free usuable” which entails for it to be 1) widely used; and 2) widely traded.

IMF does not explicit state whether CNY met its “free usability” criteria which IMF deemed not to be met in the previous SDR review in 2010. It did however mention that “the time has come to complete the liberalization of deposit rates”. As such, the pace which China loosens its guidance in rates settings could be a key determinant in IMF’s final decision. USD-CNY continued to hold steady yesterday around 6.2040 despite the firmer USD backdrop.

SOUTH KOREA: BoK Governor Lee suggested yesterday that economy is facing increasing uncertainties. This is due to persistently weak exports given the seemingly muted US recovery to date. He also cited the slowdown in China and weak yen as “cause for concerns”. A bright spot could be in domestic demand where there could be some signs of recovery. He also reiterated that BoK’s policy decision would be dependent on the corresponding impact on growth, inflation and household debt. The next BoK policy meeting is on 11 June. USD-KRW gained 0.8% yesterday to just under the 1100 mark with the near term bias tilted to the upside.

South/Southeast Asia:
** Singapore: SGD NEER eased back to +0.1% above the mid-point on higher USD-SGD

SINGAPORE: The final Q1 GDP released yesterday was revised up firmly to 2.6% y/y (market: 2.2%) from 2.1% previously. This was mainly due to a firm services sector which was revised up to 3.8% y/y from 3.1% previously in the flash estimate. The construction sector was revised down slightly to 3.1% from 3.3% while the contraction in the manufacturing sector surprisingly moderated to -2.7% vs -3.4% previously. Overall however, it still points to a challenging outlook ahead. We look for around 3.2% growth this year within the government’s 2-4% range. The latest April industrial production numbers released yesterday came in weaker than expected at -8.7% y/y (market: -3.6%) from -5.5% previously owing to a mark drop in biomedicals of nearly -29%. The electronics sector however posted a small positive of 1.2% vs -5.2% previously.

For the SGD NEER, we estimate it has eased back to +0.1% above the mid-point for USD-SGD at 1.3500, USD-MYR at 3.6360, and USD-CNY at 6.2040. The +/-2% range around the mid-point is estimated at 1.3250-1.3790, ceteris paribus.