Economic News in the Region

China: Moderation of Economic Growth May Be Inevitable

Burgeoning local debt, coupled with the prospect of even slower economic growth, appears to have put the Chinese government in a rather perplexing situation. While it faces increasing pressure to curb the rising level of local debt, it also has to ensure sustainable economic growth. But is it really reasonable to expect the accomplishment of both these objectives? This is unlikely, to say the least. China’s National Audit Office recently revealed that local government debts had swelled almost 70 per cent to RMB17.9tn by mid-2013, representing 33 per cent of the GDP. It also notified that about 60 per cent of this debt is set to mature before 2015. If we go back in time only for a moment, the 2010 audit would bear resemblance to the current scenario.  Back then, more than 50 per cent of the debt was to mature before the end of 2013. The fact that it did not happen, means majority of the loans were not paid back, but simply rolled over, albeit at higher financing costs. Hypothetically speaking, in such a scenario, more “mini liquidity crunches” can be expected going forward. NDRC’s plan to allow local governments to issue higher yield long term bonds to refinance short term debts will also push up risk premiums. As a result interbank rates in the country will reflect an upward bias even without further interest rate liberalization, financing will become more expensive for companies, and economic growth might decelerate.

In reality, however, the government has initiated a set of reforms to stem the growth of local debt and is taking measures to curb speculative lending in the shadow banking industry. China’s broadest measure of new credit fell in December, while money-supply growth and new Yuan loans trailed estimates. Aggregate financing was RMB1.23tn according to the PBOC, down 25% YoY. New credit saw a record decline in 2H13, which may limit the pace of economic expansion at a time when policymakers prioritize structural reforms and controlling financial risks. Foreign reserves in China, meanwhile, rose to a record USD3.82tn at the end of 2013, highlighting the country’s challenge in dealing with capital inflows while trying to reduce currency intervention. With the recent government crackdown on shadow banking and new limits on interbank lending, growth may indeed be slightly lower compared to 2013. With or without government intervention, the ‘new normal’ for economic expansion seems closer to the 7 per cent mark. 

Indonesia: Current Account Deficit Set to Narrow but Further Rate Hike Remains a Possibility 

It appears that the New Year has brought with it a new lease of life for the Indonesian economy. Following Bank of Indonesia’s (BI) announcement early this month, markets are turning more optimistic on improving economic fundamentals led by a narrowing current account deficit. According to BI – and this may well materialize – the deficit may fall below 3 per cent of the GDP in 2014 from a projected 3.4 per cent of the GDP in 2013. The November trade balance surprised on the upside with a surplus of USD780mn, the highest since March 2012. This is partly due to moderating import growth, which saw a double-digit decline for the first time in almost four years. On the export front, both the volume and value of exports have gained ground since 3Q13 on sequential terms, suggesting the worst might in fact be over. Not only are exports being bolstered by a weak currency and a recovery in the West, but also by the relaxation of mineral export bans by the government announced a few days ago. 

The outlook of a lower current account deficit should allow BI to take a balanced approach in containing further pressure on the rupiah and ensuring that monetary policy is not overly restrictive for GDP growth. If the rupiah remains supported going forward, further rate hikes will perhaps not materialize. 

Markets:

Markets especially in Asia have started 2014 on a weak note with H-Shares (China) index down 6.5 per cent on a year-to-date (YTD) basis. MSCI-Ex Japan is down 2 per cent YTD. This has been partly on account of capital outflows from emerging markets, which are being ploughed back into the US and increasingly recovering Europe. Japan, despite QE, is down 4 per cent YTD after its spectacular 30 per cent upmove (in USD terms) in 2013.  Increasing cautiousness on account of the Fed tapering and a strengthening USD has also resulted in weakness in Asian markets.

It is pertinent to note that most global investment banking houses are positive on the US and Europe and negative on Emerging Markets. However, the above concerns have been in the markets since June 2013 when the Fed first started talk of tapering. As such, emerging markets, especially Asia has already priced in the effect of most of these concerns. 

As economic data emanating from the US and the Europe shows signs of a strengthening recovery, and trade data from Asia recovers, it is hard to imagine that Asian economies will weaken significantly going into 2014. 

We see significant upside in Asian markets through 2014. Elections in India, Indonesia and Thailand will result in pre-election rallies in 1H 2014 and subsequently the election outcome will determine the future strength of these rallies. 

The only risk foreseen is the Chinese market collapse on account of extremely high levels of local debt (SoE debt). However, on a gross balance sheet basis, China has the wherewithal to tackle the domestic debt problems. Also, this concern has been in the markets for the last two years if not longer and as such is increasingly being priced in.

As US Fed tapering continues through the year, there would be an increasing shift of capital from fixed income to equity markets globally and this could result in strong equity market performance especially in emerging markets led by Asia.