Asia Daily Update

North Asia

CHINA: Monetary data came in quite surprising this morning. The M2 growth picked up to 13.3% y/y in July, much higher than 11.7% in the prior month and the PBoC’s target of 12.0%. In fact, in Q2 monetary policy implementation report, the PBoC did alert this and said that the M2 growth is likely to accelerate soon. Regarding the factors driving M2 higher, we believe that it could be largely due to the local government debt swap plan, the recent rescue package in the stock market and acceleration in the infrastructure investment. The new loans were RMB1.5trn (USD242bn) in July, doubling the market expectation of RMB750bn (USD120.7bn), pointing to fiscal support in stimulating the economy. Aggregate financing was only RMB718bn (USD116bn), less than half of the new loans, which means that the off-balance-sheet financing continues to shrink. This could be related to the de-leveraging in the margin trading in the stock market. In the short term, the surge of the M2 growth will not change the direction of the monetary policy stance, given the soft growth, low inflation and even deflation in the producer price index. However, as the M2 growth accelerates, the central bank could be cautions on further cut in the reserve requirement ratio. From this perspective, the cut in the policy rates could be the preferred option if the activity indicators continue to remain soft.

- Trade figures for July disappointed. Exports dropped by 8.9% y/y in July, much weaker than market consensus of -0.3% and June’s 2.1%. Imports also missed the market expectations, falling 8.6%, against a 6.7% drop in the previous month. China again registered a big monthly surplus at RMB263bn (USD42.4bn), compared with RMB353bn (USD57.9bn) in June. In general, the trade performance is not encouraging, pointing to continued softness in the manufacturing sector. As the PMIs that were released earlier also came in weaker than expected, plus that the power generation and crude steel output remained sluggish in July, we see that the growth momentum is unlikely to turn around in Q3. The strong RMB is the other key factor that has eroded China’s trade competitiveness. The RMB exchange rate has remained extremely stable against USD since March due to central bank’s intervention. The intension was to prevent large capital outflows from the country which could facilitate the SDR negotiation. However, with USD strengthening, the RMB appreciated significantly against non-USD currencies in the past few quarters, which will further drag down China’s exports in the foreseeable future.

- CPI rose 1.6% y/y in July, up from 1.4% in the prior month and a notch higher than market expected, due to rising pork prices. While the surging pork prices could continue to add pressure on CPI inflation in the next few months, we do not see a strong pass-through effect from the overall food prices. In fact the PPI deflation is more serious. PPI declined by 5.4% y/y, the lowest since the global financial crisis and compared with -4.8% in June. The recent plunge of commodity prices led by oil should have played an important role in driving PPI inflation lower. More importantly, the deterioration of PPI deflation also reflects the weakness in both domestic and external demand, as well as continued de-leveraging process in China’s manufacturing sector. As the CPI inflation remains well below 2.0%, the policy focus is definitely the PPI deflation at this stage, suggesting that the monetary policy would remain accommodative in the second half this year. However, there are a few issues that need to be addressed. In Q2 monetary policy implementation report, the PBoC mentioned that the excess deposit reserve is quite high, at 2.5% of total deposits by end of Q2, suggesting that the liquidity conditions are extremely relaxed. From this perspective, further cut in the RRR seems to only have limited impact. Second, the commercial banks are still reluctant to provide money to the real economy, due to concerns of the credit risks. Third, the non-performing loans (NPL) are rising, which could have constrained the banks’ capacity to expand the balance sheet. All these point to the limit of the monetary policy and reflect the policy ineffectiveness. Over the short term, as the real lending rates have picked up further due to PPI deflation, we believe the PBoC will likely need to cut the policy rates.

- The PBoC surprisingly spiked the USD/CNY fixing by 1136pips or 1.86% this morning to 6.2298, the biggest daily deprecation since 25 April 2013. While the weak trade figures should have pushed the USD/CNY fixing to the weak side, this move is still quite out-of-consensus. The fixing rates have been hovered around the 6.12 level since April. We view that this is due to the operational issues regarding RMB’s inclusion into SDR. The IMF mentioned in the divergence of the CNY-CNH, the short trading hour of CNY and illiquid onshore rates market is the technical issues that make it difficult for the routine operation of SDR, such as calculation of exchange rate and interest rate. From this perspective, the CNY exchange rate will be more market-oriented going forward, and the volatility of both CNY and CNH will pick up significantly. We also need to eye on the impact on Asian currencies. We see that the Asian currencies would be under pressure in the foreseeable future.

- For the week ahead, we get China’s July activity data tomorrow which will likely remain lukewarm. Both official and private PMIs came in weaker than expected, and the trade data released over the past weekend disappointed, suggesting that the activity indicators would remain soft. We see that the industrial production will moderate to 6.5% y/y in July, from 6.8% in the prior month, as the electricity generation dropped to negative territory again. In the meantime, the retail sales could gain 10.6% y/y in July, unchanged from the last month. Notably, the three biggest automobile producers all reported soft sales numbers in July. The fixed asset investment is expected to grow 11.4% y/y in January-July, largely unchanged from the previous reading.

TAIWAN: Exports fell 11.9% y/y in July, compared with -13.9% in June. The exports of machinery and electrical equipment declined by 4.8% in July, up from -13.4% in the previous month. Import growth slid further to -17.4% in July, versus -16.1% in June, due to softer oil prices. Overall, Taiwan’s trade figures remained soft, but could pick up somewhat in the coming months, as Apple is likely to launch the new smart phone in late Q3 which would promote the trade flows in Greater China region.

South/Southeast Asia

INDIA: On the data front this week, we’ll be July’s trade numbers sometime this week, June industrial production and July CPI on Wednesday, followed by July WPI on Friday. Exports are likely to remain weak and contract for the 8th consecutive month. Industrial production is likely to stay soft around the 3% y/y pace. The focus will be on the inflation numbers where CPI is likely to ease to 4.4% y/y from 5.4% previously but food inflation will be closely monitored in the next two months. WPI inflation is expected to stay in negative territory at -2.8% from -2.4% previously. For USD-INR, it bounced off the low of 63.75 yesterday to close marginally higher around 63.87. We look for the 63.50-64.50 range near term.

SINGAPORE: The final reading for Q2 GDP reported this morning was revised up slightly to 1.8% y/y from the flash estimate of 1.6%. This implies 2.3% growth for H1. Full year 2015 growth was narrowed to 2.0-2.5% from 2-4% previously, implying relatively stable growth in H2. Looking at the details, the services sector was revised up to 3.4% y/y (flash: 3%), construction was just marginally lower at 2.5% (flash: 2.7%), while the manufacturing contraction worsened to -4.9% (flash: -4%). For the export outlook, non-oil domestic exports (NODX) for 2015 is seen at a modest 1-2%. For USD-SGD, it is just slightly higher to 1.3820 after the GDP report after closing lower yesterday.

For the SGD NEER, we estimate it is at -0.6% vs the mid-point for USD-SGD at 1.3820, USD-MYR at 3.9370, and USD-CNY at 6.2100. The +/-2% range around the mid-point is estimated at 1.3470-1.4020, ceteris paribus.

MALAYSIA: June’s industrial production released yesterday held steady at 4.3% y/y from 4.5% in May. The gains were led by the manufacturing sector which rose 4.9% y/y from 3.2% in May. The mining sector slowed to 4.0% from 9.0% in May, while the electricity sector fell by 2.3% following a 1.2% gain in May. On a 3mma basis, growth momentum continued to moderate for the fourth straight month to 4.3% y/y from 5.2% in May. Given the weak external demand picture and lingering political uncertainties domestically, production could remain lackluster near term.

On the data front this week, the focus will be on Q2 GDP on Thursday. We look for a further slowdown to 4.5% y/y from 5.6% in Q1. The main drags are likely to come from 1) weak exports; and 2) weaker services sector growth from Q1’s 6.4% - private consumption is likely to be weaker due in part to the front-loading of consumption ahead of the GST implementation in April. For USD-MYR, it continued to head higher in the past few days and showed few signs of reversing the uptrend over the past year. After holding relatively stable around 3.80 for most of July, it has already gained 2.8% in August to 3.94. Year-to-date, it is the worst performing Asian currency, down 11.2% vs USD. On the political front, an abrupt resignation from the long-term serving BNM Governor, Tan Sri Zeti Akhtar Aziz, could also see a knee-jerk jolt to market confidence. This is in response to reports of Zeti stepping aside after 15 years on health reasons.