Asia Daily Update

• China: Reserve requirements for FX forwards could be extended to all derivatives
• Singapore: Weak August PMI consistent with the regional weakness
• Indonesia: Governing coalition gains more seat in parliament
• Indonesia: Infrastructure development bank to be set up next year

North Asia

CHINA: There were further reports and rumours yesterday that the proposed reserve requirement for FX forwards trading could be extended to all derivative products. For example, for forwards and swaps, 20% of the nominal value will need to be set aside. This will be denominated in USD, at zero interest rate, and held for one year. For options, the reserve requirement is rumoured to be as high as 50% of the nominal value. The new measures are expected to take effect from 15 October 2015. As noted previously, this is aimed to 1) curb speculation and unwarranted volatility in the FX market; and 2) reduce PBoC intervention to stem CNY depreciation pressures. There have not been any official announcements as yet. China is closed for the next two days for the Victory Day parade.

As an indication of PBoC’s intervention over the past year, China’s FX reserves have fallen by 8.5% or USD342bn to USD3.65trn at end-July 2015 vs the peak of USD3.99trn in June-2014. It most likely fell further in August given the devaluation on 11 August and measures to stem a further slide. Since the start of the year, it is down around USD192bn or USD27bn per month. A recent Bloomberg survey in early August has analysts expecting a further USD200bn drop in FX reserves to USD3.45trn by year-end. This implies around USD40bn per month from August to December, which also gives an estimate of the expected size of PBoC intervention. August’s FX reserves are scheduled to be released on 7 September.

South/Southeast Asia:

SINGAPORE: August PMI released yesterday remained weak and slipped further in contraction territory. It fell to 49.3 from 49.7 previously and below 50 for the 2nd consecutive month. The electronics PMI was also weak at 49.0 from 49.5 previously. This is consistent with the weak PMI reports around the region in the past week, including for China. The latest MAS Survey of Professional Forecasters also saw the GDP forecast for 2015 revised down to 2.2% from 2.7% in the previous survey in June. This is also in line with the revised official projection of 2.0-2.5%.
For USD-USD, it gained around 40 pips yesterday to 1.4160. Overall, our bias remains to the upside and still prefer a buy on dips story. The initial target is at 1.42 and after that, we can see it heading towards 1.45 by year-end, particularly if the Fed remains on course to lift rates this year and the USD remains firm. The other key factor to watch will be CNY’s direction where a further depreciation will also spillover to a weaker SGD.

INDONESIA: President Widodo received a boost yesterday with the National Mandate Party defecting over to the governing coalition. This brings its share of the parliamentary seat to 46% from 37% previously. While it remains a minority in parliament, the defect lends the President greater support amid plans by the government to revise regulations.

Separately, Finance Minister Bambang Brodjonegoro said yesterday that an infrastructure development bank will be set up by next year. He added that the concept of public-private partnership (PPP), which was projected to finance 36% development for the next five years have yielded limited success given problems such as land acquisition. The move to increase funding options is part of the government’s push to accelerate infrastructure development. Earlier moves include increasing the government infrastructure budget for next year, and bringing forward project tenders to ensure more timely disbursement. For USD-IDR, it edged up 0.3% to 14,137 yesterday.