Friday

Aug. 14, 2015

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Yuan Global Growth Impact; Hong Kong, Taiwan GDPJUSTIN JIMENEZ AND BEN BARIS, BLOOMBERG BRIEF EDITORS

YUAN: Global growth projections are holding up against China’s surprise move tochange its exchange-rate regime as economists remain confident a slowdown therewon’t be severe enough to derail the world economy. Forecasters see the globaleconomy gaining 3.1 percent in 2015, unchanged from their consensus view a monthearlier, a of economists Aug. 7-12 showed.Bloomberg survey

WHAT TO WATCH: probably fell 2.9 percent yearIndia's wholesale price inflation on year in July, extending eight months of negative readings, 2:30 p.m. Hong Kong's

may have expanded 2.3 percent year on year in the second quarter, 4:30 p.m.economy second-quarter will likely show 0.6 percent year-on-year growth, 5 p.m.Taiwan's GDP

ECONOMICS: Air pollution is killing an average of 4,000 people a day in Chinaaccording to the study by , an independent research group, who citedBerkeley Earthcoal-burning as the likely principal cause. AssistantReserve Bank of AustraliaGovernor delivers a speech in Brisbane, 10:15 a.m.Christopher Kent

MARKETS: Demand ebbed for haven assets from to , while bonds gold equities advanced in Europe and emerging markets after the PBOC signaled support for theyuan. ended little changed. and areU.S. stocks South Korean Pakistani marketsclosed for holidays.

(All times local for Hong Kong.)    

COMMENTARY IN THIS ISSUE

Where now for the ?yuan(photo) and Tom Orlik

examineFielding Chen two views following thisweek’s shift inmanagement of theChinese currency.

Asian currencies haveweakened in line withtheir risk factors this year— and may bounce backas those various threatsare resolved: TamaraHenderson.

Despite benignIndia's CPI in July and manufacturing pickup inJune, the RBI may be wary of reducingrates for the rest of the year: TamaraHenderson.

NUMBER OF THE DAY

—$14 billion The amount foreigncurrency-denominated debt of Asiancompanies outside of Japan and Chinahas increased, Bloomberg-compiled datashow, after the record devaluation of theyuan dragged down almost everycurrency in the region. Read more on theBloomberg .terminal

EQUITY MONITOR

YUAN  TOM ORLIK AND FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMISTS

Singapore Dollar Pays Liquidity Price as Yuan Moves Asia

Singapore’s dollar is paying the price for being easy to sell. Following China’s shockdevaluation, it’s tumbling at the fastest pace since 2001 as traders use it as a proxy for lessliquid currencies such as the Thai baht and Indonesian rupiah. The island state’s currencydropped below the S$1.39 year-end estimate versus the U.S. dollar in a Bloomberg survey,leaving banks rushing to review predictions. There are domestic concerns, too, as investorsspeculate whether Singapore will ease policy after China’s shock move, just as it did inJanuary when the Swiss National Bank scrapped its exchange-rate peg. The MonetaryAuthority of Singapore issued a statement Wednesday saying it stands ready to curbexcessive volatility in the city-state’s currency. Read the full story on the .Bloomberg terminal

— Netty Ismail, Bloomberg NewsSource: Bloomberg

Aug. 14, 2015 Bloomberg Brief Economics Asia 2

YUAN  TOM ORLIK AND FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMISTS

People's Bank of China Strikes Back at Competitive Devaluation ClaimsWhere now for the yuan? There are two

views following this week’s shift inmanagement of the Chinese currency.

The first view, set out by the People'sBank of China in a forceful statement andpress conference Thursday, is that thisrepresents a genuine reformist move toclose the gap between the fixing and thespot rate and give the market a greaterrole in setting the exchange rate. ThePBOC argued that China's resilientgrowth, current account surplus andabundant foreign exchange reservesmean there is no basis for sustaineddepreciation. Officials hinted that a 3percent undervaluation has now beenremoved.

The second view is that this is acompetitive devaluation dressed up asmarket reform, and that a substantial dropin the yuan will be required to restoreexport competitiveness. In the face ofslumping growth, China is turning to itsold playbook of an undervalued currencyto give exports a boost. At today's pressconference, the PBOC called reports thatthey want 10 percent depreciation"nonsense."

Prior to the PBOC's press conference,our expectations were that regardless ofwhether the aim was market-basedreform or competitive devaluation, theimmediate result would be the same: aperiod of yuan depreciation. After thepress conference, with the PBOC sendinga strong signal that it sees the yuan atclose to fair value and emphasizing thatChina is not pursuing competitivedevaluation, we raise our estimate thatthe markets will pay attention and theyuan will hold steady around the currentlevel.

Underneath the theories are the facts todate. On Tuesday, the People’s Bank ofChina set the central parity — a dailyfixing used to guide the exchange rate —down 1.9 percent. The PBOC alsoannounced that in future the marketwould play a decisive role in valuing thecurrency. The yuan spot price has alreadydropped to 6.3982 as of Thursday's close,down from 6.2097 on Monday.

What’s driven that historic shift fromappreciation to depreciation, and fromhands-on management by the PBOC to ahands-off approach? A critical factor is

the change in China’s trade balance withthe rest of the world. Back in 2007,China’s current account surplus wasabout 10 percent of GDP. That seemed toindicate substantial yuan undervaluation,as much as 40 percent according to someanalysts. Now the current accountbalance is about 2 percent of GDP,suggesting the yuan is close to fair value.The PBOC hopes it can take its hands offthe controls without extreme movementsin either direction.

The dwindling current account surplus

provided the opportunity for the centralbank’s move. Motive comes from theimpact of a strong yuan on exports. Asexpectations of a first rate increase fromthe U.S. Federal Reserve drove the dollarup, the yuan's dollar peg had resulted in a14 percent appreciation in real effectiveterms. That dealt a major blow to exportcompetitiveness, contributing to the 8.9percent contraction in overseas sales inJuly. Combined with fading real estateconstruction, that's dealt a one-two blowto China's growth, with the main domestic

Continued on next page…

Current Account Surplus as % of GDP and Exchange Rate

Real Effective Exchange Rate and Export Growth

Aug. 14, 2015 Bloomberg Brief Economics Asia 3

 Continued from previous page...

YUAN…

and international drivers both faltering.Recognizing those factors, for the last

eight months the pressure from themarkets has been for depreciation. Theyuan spot price has consistently beenweaker than the central parity. Theoffshore spot price (set by the market)has been weaker than the onshore(confined within a 2 percent tradingband). The PBOC has been using its dailyfixing to claw back the market losses ofthe previous day. FX reserves haveshrunk from a high of close to $4 trillion inJune 2014 to $3.65 trillion in July this yearas the PBOC has sold dollars to battledepreciation.

Tuesday's move showed the PBOCfinally bowing to market pressure for aweaker currency. The downward shift inthe central parity to 6.2298 from 6.1162on Monday was the largest depreciationon record and the second-largest one-daymove in either direction. The largest wasthe July 2005 move when the PBOCbroke the yuan's peg to the dollar.

The main economic benefit of a weakeryuan is restored competitiveness forexports, a sector that continues to add upto more than 20 percent of GDP. Even so,a large-scale export rebound will happenonly with a lag and only if depreciation ismore significant than seen in the last fewdays. Our calculations suggest 10 percentdepreciation in China's real effectiveexchange rate could add 10 percentagepoints to export growth, with a lag of threemonths. At its press conferenceThursday, the PBOC was dismissive ofthe idea that this is what it is targeting.

There are also costs to depreciation.Most obvious is the risk of capital flight.Our estimates suggest that 10 percentdepreciation against the dollar would riskcapital flight of some $400 billion. China'sleaders likely calculate that set againsttheir $3.65 trillion foreign exchange stash,that's a risk they can handle. A weakeryuan will also reduce the appeal ofdomestic assets, potentially dealing afurther blow to equities and to the nascentrecovery in the real estate sector. At their

 press conference, the PBOC said thatcapital flows are currently in the normalrange.

A cheaper yuan will change the patternof winners and losers among China'sbusinesses. Exporters will do better,partly from stronger demand and partlyfrom the translation of dollar earnings intocheaper yuan. Importers will suffer as theprice for everything from oil to iron oregoes up. Already wafer-thin profit marginsfor some parts of the industrial sector maynarrow further. The producer price index— stuck in deflationary territory sinceearly 2012 — may start to rise.

One reason China was expected toresist the siren call of depreciation is thehope for yuan internationalization, inparticular inclusion in the IMF's specialdrawing right basket. That is still on thetable. Indeed, the IMF has welcomed themove as a step toward a market-setexchange rate. Explicit criticism from theU.S., European Union and Japan may bemuted by the fact that all major centralbanks have been using the exchange rateas an easing channel in recent years.

Nonetheless, we think the yuan'schances of making it into the SDR basket

have taken a hit. That's for two reasons.First, a weaker yuan will be less attractiveas an investment instrument. If the yuanis less widely used in international tradeand finance, it will score lower on all themetrics the IMF uses to decide whether itqualifies for SDR status. Second, there'sa fair mixture of politics in the IMFdecision. If the yuan does depreciatestrongly, the main losers will be China'strade partners and the politics of thedecision will move against the yuan.

Looking longer term, if this is a genuinemarket-based reform, that should have apositive impact on China's rebalancingagenda. A market-set exchange rateshould encourage firms to make rationaldecisions about whether to produce forthe domestic or overseas markets. Theend of the old bias in favor of producingfor export — a function of an undervaluedyuan — should mean more investment inthe domestic services sector. As the latteris more labor-intensive thanmanufacturing, over time that will meanmore employment and higher incomes —a positive for rebalancing towardconsumption.

 

CURRENCIES  TAMARA HENDERSON, BLOOMBERG INTELLIGENCE ECONOMIST

Shift in Central Parity the Largest Depreciation on Record

Read this analysis with additional interactive charts on the Bloomberg terminal at .BI ECON

Aug. 14, 2015 Bloomberg Brief Economics Asia 4

CURRENCIES  TAMARA HENDERSON, BLOOMBERG INTELLIGENCE ECONOMIST

Risk Yardstick Suggests Asian FX Moves Are AppropriateThe Asian currencies with the largest

number of risk factors have declined themost against the U.S. dollar this year.This suggests that market movementshave broadly reflected economicfundamentals. If the relationship remainsintact, then the eventual unwinding ofcurrent risk factors could see thetransformation of underperformers — theAustralian dollar, Indonesian rupiah, NewZealand dollar and Malaysian ringgit —into outperformers.

Asia's currencies face the samechallenges from the external environment— evolving expectations about the timingof the Federal Reserve's rate increase,shifting odds of Grexit, plungingcommodity prices, tepid global demandand ample liquidity. This year the region'scurrencies have moved in tandem, alldepreciating against the U.S. dollar andmost gaining against the yen and euro —though some have moved more thanothers.

China's surprise adjustment on Tuesdayof its managed-float currency regime —moving to a system with lessmanagement and more float — is thelatest challenge for regional currencies.Excluding the Chinese yuan, theMalaysian ringgit was punished the most,with a 2.7 percent drop against the U.S.dollar in the three trading sessions sinceMonday's close, followed by theIndonesian rupiah and Indian rupee,which fell 2.4 percent and 2.3 percent,respectively.

The magnitude of impact on individualcurrencies depends on each country'svulnerabilities. The table indicates thesensitivities of individual Asian currenciesto key risk factors currently in play in theglobal economy. The currencies with themost risk factors, indicated by tick marks,would be expected to underperform withinthe group. Similarly, those with fewer tickswould be expected to outperform.

A currency's exposure to external risk

 comes through the trade and fundingchannels. Most countries in Asia are netexporters, making their currenciessensitive to weak global demand. This isparticularly true for Malaysia, where netexports are nearly 30 percent of GDP.

Countries that are net exporters to theU.S. suffer less from a strong dollarbecause their goods are cheaper for U.S.consumers to purchase. Net exporters toChina similarly suffer from a weak yuanbecause their exports are more expensivefor Chinese consumers to purchase.South Korea and Malaysia have thelargest bilateral export exposure to Chinaat 7.1 percent and 6.3 percent of GDP,respectively.

Through the external funding channel,countries with current account deficitshave larger currency risk when riskappetite is weak or faltering. Those withlower real yields have a harder timeattracting investors. India has Asia'shighest five-year government yield afterinflation, while Australia has the lowest inthe group.

Other risks include valuation, policy and inflation. Expensive currencies are less

appealing to bargain hunters and mayhave diminished return potential. Foreigninvestors abhor political uncertainty,

which is heightened as electionsapproach or when a government has amore difficult task of putting through keypolicy measures. A country with morepersistent inflation risk is also lessappealing to foreign investors.

Altogether, a compilation of the key riskfactors provides a yardstick to assess therelative movement of Asian currencies.

It turns out that the relative performanceof Asian currencies against the U.S. dollarso far this year has been roughly in linewith the number of risk factors. The Indianrupee has outperformed Asian peers andthe currency is in the group with the leastrisk factors. The New Zealand dollar,Malaysian ringgit, Australian dollar andIndonesian rupiah have depreciated themost and have the most risk factors.

Further refinement of the yardstick — giving greater weight to more extreme

—exposures to a particular risk factor improves the alignment between thesemeasures and the relative performance inthe Korean won and Malaysian ringgit.

If the relationship between the numberof risk factors and performance holds,then the unwinding of current risks atsome point in the future may foreshadowa reversal of fortune for Asia's worstperforming currencies.

 

INDIA  TAMARA HENDERSON, BLOOMBERG INTELLIGENCE ECONOMIST

Asian Currencies Have Different Sensitivities

Aug. 14, 2015 Bloomberg Brief Economics Asia 5

INDIA  TAMARA HENDERSON, BLOOMBERG INTELLIGENCE ECONOMIST

India's Data 'Win-Win' Spells RBI Status QuoIndia's benign July CPI report and

encouraging pickup in Junemanufacturing score a "win-win" for theoutlooks on inflation and growth.Investors will be tempted to put greaterweight on the inflation report, hoping foranother rate cut thanks to the centralbank's newly adopted inflation target andChina's recent yuan devaluation.

Yet Reserve Bank of India GovernorRaghuram Rajan may put greater weighton the implications of stronger productionfor growth. Absent a significant shortfall ininflation relative to RBI projections orsigns of parliamentary approval of criticalgovernment reforms, Rajan may be waryof reducing interest rates for theremainder of the calendar year.

India's inflation dropped in July, just asthe Reserve Bank signaled that it would.Combined consumer price inflation fell to3.78 percent year on year, the softestreading since the low for this series inNovember 2014, from 5.4 percent inJune. The moderation was due to a"large" favorable year-over-yearcomparison for food prices, which theReserve Bank has said it would "lookthrough."  

The Reserve Bank expects inflation torise beginning in September, approachingthe 6 percent target by January as thefavorable base effect fades. At the sametime, the impact of earlier rate cuts —which were "front-loaded" in the first place— will also be starting to lift economicgrowth. Near-term inflation expectationsare already back in the double digits aftertwo quarters under 10 percent.

Meanwhile, growth appears to beholding up. Industrial productionaccelerated to a 3.8 percent year on yeargain in June from 2.5 percent in May,thanks to a turnaround in themanufacturing of consumer durables.This confirms indications from strongercar sales and, along with decentmonsoon rainfall so far, is consistent withGDP growth above 7 percent in the firsthalf of the year. Since household

spending accounts for 57 percent of GDP,this suggests sustained upward pressureon prices.

Altogether, this is not a scenario forcutting policy rates further at this stage.There are 75 basis points of easingalready in the pipeline, and inflation will

be rising from September with inflationexpectations already in the double digits.A rate cut so soon after China'sdevaluation might also be misinterpretedas a play in the "currency war," whichwould run the risk of undermining Rajan'scredibility.

 

TODAY'S DATA

RBI Will 'Look Through' Soft CPI in July and August

Manufacturing Mirrors Car Sales Signal for Growth

Aug. 14, 2015 Bloomberg Brief Economics Asia 6

TODAY'S DATA

 

DATE COUNTRY EVENT SURVEY PRIOR

6:45 New Zealand Retail Sales Ex Inflation QoQ 0.50% 2.70%

11:00 New Zealand Non Resident Bond Holdings — 69.70%

13:00 Singapore Retail Sales SA MoM -2.60% 2.40%

13:00 Singapore Retail Sales YoY 3.50% 6.10%

14:30 India Wholesale Prices YoY -2.90% -2.40%

15:30 Thailand Foreign Reserves — $156.9B

16:30 Hong Kong GDP SA QoQ 0.20% 0.40%

16:30 Hong Kong GDP YoY 2.30% 2.10%

17:00 Taiwan GDP YoY 0.60% 0.64%

17:00 Euro Area GDP SA QoQ 0.40% 0.40%

21:15 U.S. Industrial Production MoM 0.30% 0.20%

22:00 U.S. U. of Mich. Sentiment 93.50% 93.10%

— Indonesia BoP Current Account Balance -$5238M -$3848M

August 14-17 India Exports YoY — -15.80%

August 14-17 India Imports YoY — -13.40%

August 14-17 India Trade Balance -$11100.0M -$10827.0M

August 14-18 China Foreign Direct Investment YoY CNY 5.00% 0.70%Source: Bloomberg  BCAL <GO>

All times local for Hong Kong. Survey figures updated at 5:39 a.m.Click on the to see a range of economist forecasts on the terminal.highlighted releases

CURRENCIES

CALENDAR

OVERNIGHT

Sales at U.S. retailers rose in July ongrowing demand for everything from carsto clothing, and a decline the previousmonth was wiped away, signalingconsumers are propelling growth in theworld’s largest economy. The 0.6 percentadvance followed little change in Junethat was previously reported as a 0.3percent drop, a Commerce Departmentreport showed. Eleven of 13 majorcategories showed gains.

Applications for unemployment benefitsin the U.S. are hovering close to afour-decade low, a sign of muted firingsand steady progress in the labor market.

rose by 5,000 to 274,000Jobless claimsin the week ended Aug. 8, from a revised269,000 in the prior period, a report fromthe Labor Department showed. Thefour-week moving average, a less volatilemeasure of job cuts, declined to thelowest level in more than 15 years.

Greece’s economy grew in the secondquarter in a surprise surge just before thestandoff between the government and itscreditors forced officials to impose capitalcontrols. The Hellenic Statistical Authoritysaid gross domestic product rose 0.8percent, and analysts attributed thegrowth in part to consumer spending anda strong start to the tourist season.Nominal GDP, which excludesadjustments for price changes, fell 0.7percent in the period through June.

The is readyEuropean Central Bankto adjust its quantitative-easing programto respond to any market turbulence amid“unusually low” inflation and“disappointing” economic growth in theeuro area, the bank said in a summaryaccount of its July 15-16 monetary-policymeeting. Governors agreed that “thedesign of the asset-purchase programsprovided sufficient flexibility for them to beadapted if circumstances were to changeand should the need arise,” according tothe report.

Americas

Europe

MARKET INDICATORS

Format: XXXUSD Curncy, size of labels based on 30-day volatility. As of 5:36 a.m.

Aug. 14, 2015 Bloomberg Brief Economics Asia 7

MARKET INDICATORS

ECONOCHAT

Source: Bloomberg. Updated at 5:32 a.m. Hong Kong time.

Aug. 14, 2015 Bloomberg Brief Economics Asia 8

ECONOCHATMARKET CALLS   BLOOMBERG NEWS

Morgan Stanley anticipates that under the scenario of significant yuan devaluation,economies that are already suffering from deflationary pressure and have high leveragewould suffer. It expects that this would include Singapore and Thailand, as both havehigh leverage and have shown a sizable build-up in leverage in the past few years.

Stamford Management expects the Singapore dollar to slide to a six-year low ofS$1.45 versus the U.S. dollar, said Chief Executive Officer . He’s tellingJason Wangclients to sell the Singapore dollar and buy the pound. “We do see a relatively anemicexternal economy,” Wang said. “S$1.45 definitely looks like the next magnet that Singdollar will gravitate to.”

Chinese dollar-denominated junk bonds haven’t fallen far enough to make them a buyafter the nation’s currency slumped this week by the most in two decades, according to

. “This market has been a safe haven from the selloff in AsianNikko Asset Managementhigh yield bonds in recent weeks and we’re only seeing some early signs of weaknessfrom the yuan moves,” said , who manages Asian high yieldLeong Wai Hoonginvestments at Nikko, adding that if bond prices drop further, he’d be looking to buy.

National Australia Bank expects there is still a very high bar before further policyeasing by the Reserve Bank of Australia. It says recent developments in China don’talter its view that the RBA has likely finished cutting rates, though at the margin a slighteasing bias does remain because of spare capacity in the Australian economy. Itexpects no rate increase before 2016.

Bank of America Merrill Lynch economist lowered his 2016 GDPHak Bin Chua growth forecast for Malaysia to 4.5 percent from 5.2 percent previously. Chua expectsthe impact of the goods and services tax to linger for the rest of 2015.

COMMENTARY ON THE WEB

The 's Thomas KlitgaardNew York Fedand David Lucca examine if money ispushed overseas by asset purchase

in a post to the bank's programs Liberty blog. "The euro’s fallStreet Economics

has been a key channel through whichthe ECB’s asset purchase policy hasaffected financial markets in the rest theworld," they write. "However, the idea thatforeign asset prices would be pushed upby a surge in money flowing out of theregion, as some observers predicted,runs contrary to balance of paymentsaccounting and asset pricing principlesand should be discounted."  

China will continue to face issueswith its stock market until it completes

, argues Douglas J. Elliot ofits reformsthe . "Fixing theseBrookings Institutionfaults will take years and will requireovercoming powerful vested interests,leaving the markets vulnerable in themeantime to excessively sharp rises andfalls in value," he writes.

 Bloomberg Brief: Economics Asia

 

 

 

 

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