Asia-Pac On The Move

Idea of this article is to provide fortnightly Investment/financial market related news/views in high growth Asia Pacific markets Ex India for purposes of information and eventual investment opportunities for readers of DSIJ who would like to diversify their investment horizon outside India

Shanghai’s Free Trade Zone Emphasizes Government Focus on Long-Term Structural Growth

China launched the Shanghai Free Trade Zone (SFTZ) on September 29, with four tariff-free zones around the Shanghai area. This FTZ news has led to a lot of euphoria in the recent weeks in the Shanghai area given that its ramifications in terms of opening up the economy to foreign companies may be significant. Thus, property prices in this area have shot up significantly in the last few weeks. 25 companies and 11 financial institutions, which include DBS and Citibank, have been approved to commence operations from this zone. While there is hitherto little detail on how the zone would function, a government notice did mention a 2-3 year timeframe for the SFTZ reform experiment. Also mentioned, were the six service industries which will open up, namely financial, shipping & logistics, commercial trade, professional, cultural, and social services. Foreigners will receive the same treatment as Chinese firms, provided they invest in areas which are absent from this list. 

The primary challenge for the government would be to effectively ‘ring- fence’ capital flows within the SFTZ, under full currency convertibility of the capital account. The inauguration of the SFTZ throws light on the stress the Chinese government is placing on longer-term structural growth as opposed to short-term relief measures, and, the success of the zone could see the model being replicated nation-wide. 

China’s Manufacturing PMI for September 2013 remained constant over the previous month at 51.1, slightly below expectations of 51.6. However, exports came in significantly weaker at -0.3 per cent on a YoY basis in September against 5.5 per cent consensus estimates, while imports were largely in line with a 7.4 per cent YoY rise.

Indonesia Maintains Benchmark Rates, Unexpected Trade Surplus Hides Fundamental Issues 

Bank Indonesia (BI) kept the key BI and FASBI rates unchanged at 7.25 per cent and 5.50 per cent respectively, in line with consensus estimates. Earlier this month, trade numbers were released with exports down 6.3 per cent against an expectation of a 5.3 per cent growth. However, market fears were allayed, as imports fell 5.7 per cent, as opposed to a 12.7 per cent growth estimate. This eventually resulted in an unexpected trade surplus of USD 132 million. The market has overlooked a sustained decline in imports of capital goods, which were down 18.5 per cent on a YoY basis in the January-August period. This suggests that the moderation in domestic investment is occurring faster than expected. It was not just bad news though, for Indonesia, as foreign money has begun coming in again to the IDR government bond market. Furthermore, if one considers the slowdown in credit growth, BI’s decision to not hike rates appears justified. 

Besides data, the market will also be watching out for upcoming government announcements, one of them being the Negative Investment List. With the List up for revision this month, expectations are high for the government to enhance annual foreign direct investment (FDI) in order for it to reach the targeted USD 35-40 billion levels by 2015. This is at the back of FDI reaching a record level of USD 25 billion in 2012, representing a 26 per cent YoY increase. Changes to the list will be seen as key as it can help to ensure that the current account deficit is financed with long-term stable inflows. That FDI rather than portfolio flows will bring in foreign know-how and experience is only an added benefit that highlights the need for pro-active business-friendly government measures. 

Philippines Credit Rating Upgraded by Moody’s, Government Focused on FDI 

Moody’s raised its Philippine sovereign credit rating to Baa3 along with a positive outlook, which came as a pleasant surprise to the market. The focus currently is to increase FDI inflows into the country, which was relatively small last year at USD 2 billion. Accelerating FDI will help the country reduce its dependence on overseas workers (OFW) remittances, which hit USD 21.4 billion in 2012, making up 10 per cent of the economy. The current policy rate is at a record low of 3.5 per cent and there is no reason for the central bank to overheat the economy. 

It is pertinent to note that while economies like Indonesia and Philippines are taking measures to increase FDI as against portfolio flows into their economies, India continues to take measures to boost portfolio flows while FDI flows continue to suffer. This is also because India has a penchant for hampering exits for longer term investors or the process hurdles/delays present for long term direct investors to repatriate capital are painful. This has been a severe shortcoming of Indian policy over the last 20 years despite opening up of the economy. Recent positive pronouncements regarding the opening up of the Indian bond markets to portfolio investors is only going to further exacerbate the portfolio flows into Indian markets and create increased volatility in Indian bond markets as well similar to equity markets. 

One of the most prominent developments globally in the past fortnight was the announcement regarding appointment of Janet Yellen as the next Fed Chairwoman. She will take over from the current Chairman, Ben Bernanke in January 2014. Yellen is widely believed to be a strong supporter of Bernanke’s accommodative policies and in fact more aggressive for a further easier monetary stance. This could mean interest rates could remain lower for longer than expected. 

The RBI governor in India made a statement in a recent CNBC interview that a part of the problems that emerging economies face currently, comes from easy money policies being pursued by the West. This is absolutely in line thinking. Too low interest rates and easy money has resulted in a bigger headache for the average investor. Given the fact that the USD 1 year and 3 year fixed deposits yield only about 0.5 per cent and 1 per cent respectively and borrowing costs are only slightly higher than these levels, investors the world over have resorted to higher leverage in order to get superlative returns these past few years. Pursuit of higher returns, especially being financed by ultra-cheap borrowing costs, have created asset price bubbles, especially in real estate, private equity and commodity markets. While commodity markets have corrected somewhat, given a slowdown in demand from China, significant correction in other asset markets are still to occur. This price correction would happen once rates begin to rise again, probably in 6-9 months’ time.

Markets: 

World markets, including those in the Asia Pacific region have recovered from their summer lows, post the Fed decision to postpone the so called “tapering” i.e. reduction in the amount of monthly treasuries and bond purchases from USD 85 billion per month. This led to some respite in the emerging markets as well, and stabilization in emerging market curren- cies, given that, central banks in these countries have been able to get some more time to put their house in order and stabilize their forex reserve situation. The forced “shutdown” of the US government since September 30, and the debt ceiling paralysis would shave at least 0.25 per cent of the US GDP estimates for the current quarter as per most economist guesstimates. Consumer confidence in the US and payroll numbers have already worsened on account of this government paralysis. 

This, along with appointment of Yellen as next Fed Chair woman, would probably result in continuation of QE for at least one more quarter if not longer. This would mean one can expect a strong and synchronized equities rally in the upcoming 4-8 weeks which could extend well into the year-end if there is no major macro upheaval.