Asia Daily Update

** China: Easing bias seemingly intact on softer CPI, continued PPI deflation
** China: Reports suggest that CNY trading hours may be extended; CNY-denominated bonds may be issued in London
** South Korea: Finance Minister sees recovery on improving sentiment
** South Korea: BoK to keep rates unchanged at 1.5%
** Singapore: USD-SGD sharply lower on modest MAS easing and softer USD
** Indonesia: Indonesia: BI likely to stay on hold at 7.5%

North Asia:

CHINA: September’s CPI released yesterday eased to 1.6% y/y (consensus: 1.8%) from 2% in August. It was dragged down by lower food prices which moderated to 2.7% y/yfrom 3.7% in August. Non-food prices remained subdued at 1% from 1.1% in August. CPI remains well below the government’s target of 3% for 2015 and is at 1.4% year-to-date. September’s PPI remained in negative territory at -5.9%, unchanged from August. This marked the 43rd consecutive month of decline, since early 2012. This reflects depressed industrial production and weak commodity prices. Year-to-date, PPI is at -4.8%, even lower than -1.9% in 2014. The deflation trend in PPI gives a clearer and seemingly more accurate take of the modest growth picture for the economy.

If anything, the soft CPI reading and continued deflation in PPI leaves the door open for PBoC to pursue further targeted policy easing or at least maintain an easing bias. For example, over the weekend, PBoC extended the pilot program aimed to boost bank lending capabilities. It allows banks to pledge a broader range of assets, including bank loans, as collateral to borrow from PBoC. The program is currently in place in Shandong and Guangdong but will be expanded to nine other provinces including Shanghai and Beijing.

- There were reports yesterday suggesting that trading hour for the CNY will be extended to GMT 15:30 (23:30 local time) to overlap with European trading hours by end-November. At present, the market closes at GMT 08:30 (4.30pm local time). Separately, there were reports that China plans to issue CNY-denominated sovereign bonds in London. This would be the first offshore issuance outside of Hong Kong, and comes ahead of President Xi Jiping’s visit to the UK on 19 October.

The proposed changes come as China pushes for CNY inclusion in IMF’s SDR basket. Previously, IMF has highlighted several operational issues, namely 1) short trading hour of CNY; 2) divergence of the CNY-CNH; and 3) illiquid onshore rates market that will make it difficult to conduct routine operation of SDR, such as calculation of exchange rate and interest rate.

- On the data front, we could get monetary aggregates including August’s M2 and September’s new loans later.

SOUTH KOREA: BoK kept rates on hold as expected at 1.5%. This is the fourth straight month it has kept things unchanged after a 25bps cut in June. Despite the weakness in recent economic data, we see room for further easing given the high household debt levels. Instead, any stimulus to boost the economy would likely have to come from the fiscal side.

Finance Minister Choi said yesterday that the economy is showing signs of a recovery on the back of improvement in consumer and business sentiment. He cited the positive effects of the USD10bn stimulus that was rolled out in July and the introduction of the two-week long “Korea Black Friday” shopping season.

South/Southeast Asia:

SINGAPORE: The Monetary Authority of Singapore (MAS) implemented a token easing, seemingly the bare minimum in the latest policy statement. This is despite subdued inflation and the modest growth picture. MAS reduced the slope of the SGD NEER policy band slightly in what it termed as a “measured adjustment”. This is 2nd adjustment this year after the surprised move in January. It left the centre and bandwidth unchanged. MAS’ prime focus is still seemingly to anchor inflationary expectations. Its reticence to ease more forcibly could also stem from qualms over adding to market volatility, given uncertainties over the China slowdown and the Fed liftoff. The advance Q3 GDP slowed to 1.4% y/y from a revised 2% in Q2 (previous: 1.8%). This translated to 0.1% q/q annualized vs -2.5% in Q2 implying no technical recession. Growth is expected to come in at the lower end of 2-2.5% for 2015.
For USD-SGD, it fell 1.7% yesterday to 1.3790, weighed down partly on MAS’ modest easing but also on the softer USD backdrop. On a SGD NEER basis, we estimate it is just below the mid-point at -0.1% below it, for USD-SGD at 1.3790, USD-MYR at 4.1430, and USD-CNY at 6.3480. The +/-2% band corresponds to USD-SGD between 1.3510-1.4060, ceteris paribus.

INDONESIA: We get a series of announcements and data releases today, including:

1) Bank Indonesia (BI) policy rate decision – we expect BI to stay on hold at 7.5%. This is given the elevated inflation level (September: 6.8% y/y). If inflation moderates to BI’s 3-5% target toward year-end and IDR stabilizes, there could be a window of opportunity for BI to lower rates in November/December to spur domestic investment. However, this will also be contingent on a stable global backdrop;

2) September’s trade releases at GMT 04:00 – Exports and imports are expected to remain weak and contract by double digits at -15% y/y and -21% respectively vs -12.3% and -17.1% respectively in August. Subsequently, the trade balance should remain in positive territory for the 10th straight month at around USD550mn vs USD434mn in August;

3) Fourth part of stimulus package – This could be the last of a series of measures that have been rolled out in phases over the past two months. Overall, the main aims are to boost growth and promote IDR stability. One of the measure is something along the lines of a new annual minimum wage formula, with earlier reports suggesting that it could be linked to productivity gains. Another possible measure may be revisions to the negative investment list, which details out the proportion of foreign investment in the various sectors. For USD-IDR, it has bounced off the recent low of 13,321 towards the 13,700 level but still more than 8% lower than the recent peak of just over 14,800.