Asia Daily Update

** China’s SOE reform package to be released soon
** China: PBoC’s intervention reflects expectation of a weaker CNY
** Taiwan cut the market rates for five consecutive trading days
** South Korea eyes on yuan devaluation
** India: Soft inflation, weak data raising calls for further RBI action
**Singapore: SGD NEER holds at -1.1% vs mid-point
** Thailand: Bomb explosion in Bangkok could dent tourism
** Thailand: Q2 GDP at 2.8% y/y from Q1’s 3%; 2015 forecast lowered to 2.7-3.2%
** Indonesia: BI likely to leave rates unchanged at 7.5% later today

CHINA: Bloomberg reported that China is close to unveiling the government’s broad plans to reorganize its state-run industries. The proposal, delayed after China’s recent stock-market crash diverted the government’s attention, is expected this month and may be announced as soon as this week. Under the new regime, the State-owned Assets Supervision and Administration Commission, the agency overseeing the government’s companies, will likely transfer the shares of SOEs to state asset-management firms, who would either merge or manage companies to make them more competitive.

PBoC set USD-CNY fixing rate at 6.3966 this morning, compared with previous closing of 6.3949. In the meantime, China’s central bank injected RMB120bn cash into the market via 7-day reverse repo, compared with today’s maturing funds of RMB50bn. The increased size of reverse repo could signal that the central bank intends to prevent a spike of the onshore interest rates - as PBoC should have sold its foreign reverses to stabilize CNY exchange rate, the inter-bank CNY liquidity tightens somewhat as a result. The intervention in the FX market from the central bank also reflects the market expectation that CNY exchange rate will likely weaken further.

TAIWAN: The central bank is also quietly easing monetary conditions to spur growth. It reduced the rate on one-day certificates of deposit to 0.37% yesterday from 0.379% on Friday. It started lowering the rate last Tuesday, cutting it by 0.2 basis point on each of the first three days and by 0.3 basis point Friday. Market sees that the central bank will maintain an easing bias in the monetary policy stance due to weak economic performance, and see further upside in USD-TWD in the near term.

SOUTH KOREA: The government will prepare detailed measures to stabilize market if needed in response to risks related to China stock market volatility, yuan devaluation and Fed tightening, said Finance Minister Choi Kyung Hwan, according to Bloomberg. Choi said that short-term effects of yuan devaluation may be increasing uncertainties about Chinese and other emerging economies, which could increase financial market volatility.

INDIA: The July wholesale price index (WPI) released last Friday came in much weaker than expected at -4.1% y/y (market: -2.9%) from -2.4% previously. This was the 9th consecutive month of negative reading with declines seen in all three major categories. They included 1) primary goods (20% weight) at -1% y/y; 2) fuel, power and light (15% weight) at -2.2%; and 3) manufactured goods (65% weight) at -0.8%. July’s trade data released last Friday were also much weaker than expected with imports contracting by -10.3% y/y and exports still posting double-digit contraction at -10.3% from -15.8% previously.

Overall, given the disinflationary backdrop, lacklustre industrial production, and weak exports, there are continued calls for RBI to lower rates further. The next RBI meeting is on 29 September, after the Fed’s 18 September meeting. There are indeed valid reasons for RBI to consider further monetary stimulus after having cut rates by 75bp this year to 7.25%. However, we expect RBI to tread cautiously and adopt a wait-and-see approach given the uncertain reaction to the Fed’s expected hike in September or later this year. RBI will also be cognizant of the upside risks to food inflation if the monsoon rains are below par this year which is still forecasted by the meteorology department.

On the issue of the GST bill, the government is mulling over calling a special session of Parliament in the 2nd week of September to get the bill passed in the Upper House. It has already been passed in the Lower House where the ruling NDA coalition has a clear majority. It requires a 2/3 majority in the Upper House in order for it to be passed. The dates area likely to be confirmed only when the government is sure it has secured the 2/3 majority among the various parties, implying 163 out of the 244 members if all are present.

For USD-INR, it gained 0.5% yesterday to 65.32 to a two-year high. On a relative basis with other Asian currencies however, INR has in fact been one of the less affected by the sell-off in emerging market currencies. INR is down 3.5% YTD, with only PHP (-3.4%) and CNY (-3%) faring better. The two worst performers in Asia are MYR (-14.7%) and IDR (-10.4%). We continue to look for a supportive tone near term within the 65-66 range.

SINGAPORE: With the trade data out of the way, the only other data point of note this wee is the fortnightly COE auction prices due tomorrow. Category B COEs climbed back to SGD60,789 at the previous auction from SGD58,109 in late July. Given weak exports and sluggish growth prospects, one would expect a disinflationary environment to persist. As such, we should see either i) continued weakness in SGD; and/or ii) correction in domestic prices eg housing, wages, car prices.

For USD-SGD, it held steady yesterday between 1.4050-1.4100 and closed just a touch higher around 1.4070. For the SGD NEER, we estimate it is at -1.1% vs the mid-point for USD-SGD at 1.4070, USD-MYR at 4.1000, and USD-CNY at 6.3950. The +/-2% range for the SGD NEER corresponds to USD-SGD between 1.3640-1.4210, ceteris paribus.

THAILAND: A bomb explosion at a major tourist attraction in Bangkok, the capital of Thailand yesterday caused at least 19 fatalities and more than 120 casualties. The explosion is a setback to economic recovery given the importance of the tourism sector to growth and overall sentiment.

- Q2 GDP released yesterday slowed to 2.8% y/y from 3% in Q1, in line with expectations. The main drags were 1) weaker private consumption; 2) dip in investment; and 3) sluggish exports. The main positives were the 1) increase in government spending; and 2) increase in tourism. As a whole, the figure is considerably weak considering the low base effect (Q2 2014: 0.9%) following the military coup last May. For the full year, we see downside risks to the revised official forecast of 2.7 - 3.2% (previously: 3 – 4%). This is given the persistently weak external environment and likely hit on tourism from the bomb blast yesterday. For USD-THB, it closed 0.5% higher yesterday to close at 35.38. We look for the upper end of the 35.00 - 35.50 in the near term.

INDONESIA: Bank Indonesia (BI) will announce its rate decision today. We expect BI to leave rates unchanged at 7.5% given the need to ensure IDR stability and tackle elevated inflation. The main factor though is still FX stability. Even if inflation moderates BI’s 3-5% target by year-end, BI may not be able to lower rates significantly due to concerns over the currency. Sentiment towards IDR remains fragile given weak economic fundamentals, uncertainties over economic management, persistently high inflation, and more recently, increased volatility in the regional currencies.

On the data front, we get July's trade release later today as well. USD-IDR closed 0.3% higher last week to 13,825 and we maintain an upside bias with 14,000 as the immediate barrier followed by 14,500.