Asia Daily Update

** China: Official August manufacturing PMI slipped to 49.7 from 50.0 in July
** China: Down payment for most second-home buyers reduced to 20% from 30%
** South Korea: August’s inflation remains soft at 0.7% y/y
** South Korea: August’s exports fall sharply by 14.7% y/y
** India: Q2 GDP softer than expected at 7% y/y from 7.5% previously
** Indonesia: Moody's noted tax breaks announced last week was credit positive

North Asia

CHINA: The official August PMI manufacturing slipped below 50 for the first time in six months. It fell to 49.7 which was within expectations vs 50.0 in July. It has hovered around the 50.0 level, between 49.8-50.3, since November 2014. The final reading for the private sector Caixin/Markit manufacturing PMI for August was revised up slightly to 47.3 from the preliminary reading of 47.1. This is the 6th consecutive contraction and is still the lowest reading in 77 months, since March-2009 at the depth of the global financial crisis.

The details of both the official and private sector PMIs are worrying and point to continued manufacturing weakness eg the Caixin new orders component fell to the lowest level since March 2014. As a general rule, the official PMI is skewed to the larger enterprises and SOEs (state-owned enterprises) while the private sector Caixin PMI is biased to the small and medium size companies. In the official PMI, the breakdown by enterprises showed the component for small enterprise slipping to 46.9 from 47.9. For large enterprises, it held around 50.6 from 50.7 previously. The employment component in the official PMI will be an important sub-component to watch. It eased to 48.0 from 48.1 previously and a further deterioration will raise concerns and could signal further policy responses. For USD-CNY, it is lower this morning to around the 6.3720 area after the daily fix was set lower by 0.2% to 6.37520. This followed the lower close yesterday at 6.3723.

- China announced further property easing measures yesterday to spur demand in the second and third tier cities. With immediate effect, the minimum down payment for second-home buyers was reduced to 20% from 30%. This applies to most cities, except the first tier cities Beijing, Shanghai, Shenzhen and Guangzhou. Yesterday’s announcement follows last week’s easing of restrictions on foreign property investment.

SOUTH KOREA: August's headline inflation released this morning stayed soft at 0.7% y/y and unchanged from July. It remains below BoK’s 0.9% target for the year. Core inflation (excluding agriculture and oil related products) edged slightly higher to 2.1% from 2% in July.

Separately, August’s exports released this morning fell sharply by 14.7 % y/y (market: -5.9%) from -3.3% in July. This marks the eight straight month of contraction. At the same time, August’s imports contracted for the 11th straight month at -18.3% from -15.3% in July. More pertinently, it has contracted in double digits for eight straight months. As a whole, the weak inflation and imports print highlight the continual weakness in domestic demand. We look for a pickup in the coming months as the effects from recent fiscal stimulus measures kicks in.

Southeast Asia

INDIA: Q2 GDP released yesterday came in softer than expected at 7% y/y (market: 7.4%) from 7.5% in Q1. On a Gross Value Added (GVA) basis, it rose 7.1% y/y (market: 6.9%) from 6.1% previously. RBI maintained its growth forecast for the current fiscal year at 7.6% on a GVA basis, after lowering it from the 7.8% level in June. Although the headline numbers are still respectable from a regional and global perspective, the fact is that they also appear to over-estimate the growth picture particularly given the continued weakness in exports and modest industrial production picture of the past few months. Looking at the breakdown, farm output rose 1.9% y/y, mining rose 4%, manufacturing gained 7.2%, construction rose 6.9%, trade/hotels expanded 12.8%, and financing/insurance rose 8.9%.

Overall, given falling inflation and waning growth momentum, there is likely to be ongoing pressures from both the government and the business community for RBI to lower rates further to help support growth. RBI’s next meeting is on 29 September and at this is stage, we still expect RBI to stay on hold, awaiting the trend on food prices post-monsoon season and the market’s reaction after the September FOMC meeting. For USD-INR, it gained a bit of ground yesterday by 0.5% to 66.48. It is likely to remain well supported near term given the rebound in oil prices.

INDONESIA: Moody's said yesterday that the tax breaks announced last week was credit positive to Indonesia. In particular, new companies with a minimum investment threshold will receive tax holidays, while existing companies in certain sectors will receive tax breaks. It added that the move would aid foreign investment and raise Indonesia's potential growth. At present, Moody's rating for Indonesia is at Baa3 (stable), the lowest investment grade in its rating scale.

On the data front, August's inflation is due today at GMT 04:00. We see inflation staying elevated at above 7% levels (July: 7.3%) given 1) higher import costs from recent IDR weakness; and 2) high food prices.