Asia Daily Update

** China: RRR on CNH; currency stability is the key for now
** China’s 2015 GDP due tomorrow – market sees growth below 7%
** Taiwan: DPP wins the election by a large margin
** India: Dec trade due this week to remain weak
** Singapore: Dec exports contract by 7.2% y/y
** Malaysia: BNM to stay on hold at 3.25%
** Indonesia: Dec exports and imports fell by double digits

North Asia:

China central bank announced this morning that it would impose required reserve ratio (RRR) on yuan deposits of offshore participant banks in the mainland. The rule will take effect from next Monday (January 25). The reserve ratio was previously at zero on offshore banks’ yuan deposits in the mainland, but now will be subject to the same ratio as applicable to Chinese banks. Right now, outstanding CNH deposits are around 1.3trn, and we estimate that around 300bn CNH deposits could be affected.

We saw some sort of unwinding of short CNH positions in the morning trading session. However, the impact on overall liquidity in CNH market remains uncertain: while the new rule could tighten the liquidity in CNH market in the first place, the unwinding of short CNH positions will reduce the demand for CNH as well.

All in all, it appears that the Chinese authorities want to dampen the speculative flows that beg on a fast depreciation of its currency. Notably, in a meeting with the president of the European Bank for Reconstruction and Development last Friday, Chinese Premier Li Keqiang said that China does not intend to use a cheaper currency as a way to boost exports and has the tools to keep the currency stable. In the meantime, PBoC set USD-CNY fixing rate at 6.5590 this morning, down 47pips from the previous rate.

- China will release its GDP report for the year of 2015 this Tuesday (19 January), and we expect that China’s growth for the whole year will slow to 6.8% y/y, down from 7.3% in 2014. Activity indicators are likely to illustrate a mixed picture. The industrial production and fixed asset investment could slow to 6.1% and 10.1% in 2015, compared with 8.3% and 15.7% in 2014. While the retail sales would also moderate to 10.7% in 2015 from 12.0% in 2014, the overall sales data have been holding up quite well since Q2 2015. In our opinion, China’s economy is experiencing a structural change as deleveraging is taking place in manufacturing sector while the consumption is picking up gradually.

We think that China’s economy will grow 6.3% in 2016 versus consensus expectations around 6.5%. Our view comprises three main themes. First, China’s investment will likely drop further as property oversupply requires a multi-year adjustment. Second, as debt is mounting and demand remains sluggish, Chinese industries will go through a painful deleveraging process. Third, financial risks are accumulating as banks’ profits are falling and non-performing loans are rising. Furthermore, weakening pressure on CNY could trigger capital outflows, increasing the risk of financial instability as a result.

Taiwan has elected independence-leaning opposition leader Tsai Ing-wen as its first woman president in a landslide victory over the weekends that may increase tensions with mainland China. The DPP win was by a landslide margin. According to the China News Agency, Ms Tsai won the presidency with 56.1 per cent of the vote. The DPP also took control of the Executive Yuan parliament for the first time, taking 68 of the 113 seats compared to the KMT’s 35 seats. China’s official Xinhua news agency said that without peace and stability in the Taiwan Strait, Taiwan’s new leader “will find the sufferings of the people it wishes to resolve on the economy, livelihood and its youth will be as useless as looking for fish in a tree.”

South Asia/Southeast Asia:

India: We should get December trade numbers in the next few days. Both exports and imports are expected to contract for the 13th consecutive months, by -20% and -25% y/y respectively vs -24.4% and -30.3% respectively in November. Along with weak industrial production numbers, the weak trade numbers will once again raise the authenticity of the robust headline GDP growth of above 7% for the first three quarters of 2015. The Q4 2015 GDP report is due on 8 February. In terms of implications for RBI policy, we expect RBI to remain on a dovish bias, implying a willingness to lower rates further and to keep INR on the weakening bias or at least to keep it stable against its major trading partners. The next RBI meeting is on 2 February. For USD-INR, the upper end of the 67-68 range is seen near term.

Singapore: December exports released this morning was weaker than expected at -7.2% y/y (market: -4.4%) from -3.4% previously. The important electronics sector (1/3 of exports) held up better though at -0.3% (market: -6%) from 0.6% previously. The weak trade numbers are consistent with the trend across the region eg Indonesia, India. It is not expected to have a mark impact on the final Q4 GDP report where the preliminary reading came in at 2% y/y. Instead, December’s industrial production due on 26-January will be a more important input for Q4 GDP. Overall, the weak trade numbers should reinforce a supportive tone for USD-SGD where the immediate target is now seen at 1.4500, having gained around 1.5% year-to-date.

Malaysia: Bank Negara Malaysia (BNM) is expected to keep rates unchanged at 3.25% on Thursday. Given downside risks to growth, any change in policy stance is likely to be an easing bias. However, BNM’s flexibility is hindered by 1) the need to guard MYR stability amid the Fed normalization cycle; 2) upside risks to inflation due to the higher import costs arising from the pass-through from the weak MYR; and 3) high household debt levels which was 88% of GDP at end-2014. If anything, BNM would ensure overall loose monetary conditions by allowing the MYR to weaken in line with the rest of Asian currencies. For USD-MYR, it gained 0.1% on Friday to close at 4.3970. A supportive tone is still seen near term.

Indonesia: December’s trade report released last Friday pointed to continued weakness in external and domestic demand. Exports contracted for the 14th straight month by 17.7% y/y vs -18% in November. Imports contracted for the 15th straight month by 16% vs -18% previously. Taken together, the trade deficit narrowed to USD 236mn from USD 346mn previously.

For full year 2015, the trade balance recorded a surplus of USD7.6bn, the first time in four years. However, the primary reason was the sharper fall in imports compared to exports. This underscores the weak domestic demand picture. For the coming year, the revival of the investment cycle will very much be dependent on 1) implementation of economic stimulus packages; 2) pace of government spending; and 3) liberalization of foreign investment policies. On this note, the government is likely to announce a first round of foreign ownership easing for some sectors by the end of this month. These include e-commerce, pharmaceuticals, hotels, cinemas and medical equipment. For USD-IDR, it held steady on Friday to close at 13,910.