Asia Daily Update

** China: CNY still under pressure due to capital outflows
** Taiwan’s GDP forecast lowered by the government
** South Korea may allow overseas won conversion
** Singapore: July exports remain soft
** Malaysia: Persistent capital outflows drive MYR even lower
** Thailand: Q2 GDP today seen stable around 2.8% y/y
** Indonesia: Growth target for 2016 set at 5.5%
** Indonesia: Corporate income tax to be lowered in 2017

North Asia

CHINA: PBoC set the USD-CNY fixing rate at 6.3969 this morning, compared with the previous fixing of 6.3912. Both CNY and CNH exchange rates traded within a narrow range last Friday and this morning. Ma Jun, chief economist of PBoC, said over the weekend that the CNY exchange rate will probably move in both directions in the future, following last week’s devaluation. In addition, FX purchase positions on the balance sheet of PBoC dropped by CNY308bn in July, the biggest decline in record. This signals that the central bank stepped up intervention to stabilize the CNY exchange rate in July. In general, CNY is still under pressure to weaken due to strong capital outflows.

- Yuan positions on the balance sheet of the People’s Bank of China totaled RMB26.4trn ($4.13trn) at the end of July, dropping RMB308bn in the month. This is the biggest decline on record in July, singling that capital outflows picked up and the central bank stepped up intervention to support the yuan.

For the week ahead, China will release property price data on Tuesday. The focus would be whether the property prices will continue to surge in the first-tier cities. It was reported that Beijing has tightened the housing purchase policy last week.

TAIWAN: The economy expanded by 0.52% y/y in Q2, compared with market consensus of 0.60%. The statistics bureau cut the GDP forecast to 1.56% for 2015, down from 3.28% previously. In the meantime, the exports and CPI forecast has been lowered to -7.1% and -0.19% respectively this year, from -2.62% and 0.13% previously. As the economy continues to slow down, the market interest rates declined significantly in the past two weeks, due to expectations of further monetary policy easing. USD-TWD breached above 32 due to growth concerns.

SOUTH KOREA: The regulator may allow foreign corporates and individuals to convert won holdings into dollars from overseas and invest in Korean stocks and bonds from abroad, Chosun Ilbo Newspaper reports, citing unidentified government official. Currently, overseas won trading is not allowed on concerns about the possible shock to the domestic financial system. For the week ahead, South Korea will release PPI data on Wednesday morning, and the PPI will likely drop further due to falling commodity prices.

South Asia/Southeast Asia

SINGAPORE: Non-oil domestic exports (NODX) released this morning affirmed the challenging outlook for Singapore and Asian exports in general. NODX fell 0.8% y/y in July. On a 3-month moving average (3mma) basis, it slowed to 1.1% from 2.1% previously. The government recently revised down its export outlook for 2015 to just 1-2% from a lackluster -0.8% in 2014. Electronic exports (30%) managed to pick up to 2.3% y/y on a 3mma basis from 0.1% previously but non-electronics (70%) continued to slow to just 0.6% y/y from 2.9% previously. The latest reading affirms the benign growth outlook for 2015, with the government recently narrowing its projection to 2-2.5% from 2-4% previously. In terms of implications for policy, we expect MAS to tolerate a weaker SGD ie at the weak end of the policy band, owing to weak growth and downside risks for the regional currencies, namely MYR and CNY. We look for a continued upside in USD-SGD to 1.45 by year-end.

MALAYSIA: While most Asian currencies were relatively stable last Friday, MYR continued to drop. USD-MYR shot up nearly 3% in early trading before easing back to close 1.7% higher for the day at 4.0805. MYR’s weakness has been driven by lower oil and commodity prices, weak export growth which is contributing to the lower current account surplus, and the lingering political uncertainty surrounding the quasi-SWF 1MDB. This has exacerbated capital outflows and exerting further downside pressure on MYR. BNM data showed outflows totaled NYR5.2bn in July. Total foreign outflows have amounted to MYR12bn in equities and MYR19bn in bonds in H1 2015.

MYR is the worst performing currency in Asia year-to-date, down 14.3% as of last week followed by IDR at -10.1% vs USD. Ensuring investor confidence remains a key factor for the government near term. FX reserves have fallen below USD100bn for the first time since 2010 from a high of USD just under USD137bn in May-2013. The specter of capital controls continue to circulate among investors. This is not our base case but we would not rule it out if the government has no option ie if MYR continues to fall sharply and outflows accelerate.

INDONESIA: President Widodo outlined his 2016 economic roadmap in his address to the country on Friday. The broad aim is to lift growth to 5.5% from this year’s target of 5.2%. The key points were 1) an increase infrastructure budget to USD22.6bn, or 8% higher from this year; 2) bring forward pre-tenders of infrastructure projects to allow disbursement of budget from January. This would help accelerate government disbursement which has been one of the main impediments to growth this year; and 3) reduce energy subsidies and increase tax collection to improve funding for economic and social development projects.

- Separately, Finance Minister Bambang Brodjonegoro said on Friday that corporate income tax will be lowered in 2017 from the current rate of 25%. The President’s Chief of Staff Luhut Panjaitan had suggested in May that the rate could be lowered to around 17.5%. While the move marks a positive step towards attracting foreign investment, the perception of anti-trade and protectionist policies could continue to weigh on foreign investor sentiment eg the ban on ship imports and an increase in consumer goods import duties last month.

This week, Bank Indonesia (BI) will announce its rate decision on Tuesday. We see BI keeping rates on hold at 7.5% given the need to ensure IDR stability and guard against elevated inflation. Even if inflation was to moderate towards year-end to within BI’s 3-5% target, BI may not be able to lower rates significantly due to concerns over the currency. Sentiment towards IDR remains fragile given the weak economic backdrop, uncertainties over economic management, persistently high inflation, and more recently, increased volatility in the regional currencies. USD-IDR held within a narrow range last Friday between 13,750-13,850. However, it was still up 1.8% for the week to 13,787 and the 14,000 level is now the immediate barrier followed by 14,500.

THAILAND: Q2 GDP due today at GMT 03:30 is expected to moderate slightly to 2.8% y/y from 3% in Q1. This would fall below the official target of 3% which was revised downwards from 3.7% last month. The main drags could come from sluggish exports and slow government disbursement. One bright spot though could be the strong recovery in tourism sector which has been aided by the weakness in THB. For USD-THB, it closed 0.2% higher last Friday at 35.22. We look for the upper end of the 35.00-35.50 range near term.