Nielsen’s Global Consumer Confidence Survey on investment attitudes shows 48 percent of consumers in the Asia Pacific region said they were invested in the markets or used investment services. That compares to just 27 percent in North America, 21 percent in the Middle East and Africa, 16 percent in Europe and 13 percent in Latin America.
Asia’s appetite for risk is also seen in investors’ ability to withstand market volatility. Oliver Rust, the Managing Director of Nielsen says Asian investors tend to trade more aggressively and more frequently than their European counterparts.
More than half (57 percent) of Asia Pacific consumers say they’re willing to accept fluctuations of more than 10 percent. Only half of investors in the U.S. will stomach those swings and just 45 percent in Europe.
Rust says Asian investors tend to have a higher proportion of disposable income allowing them to take more risks.
Disposable incomes in Asia are higher because a growing working population has led to more households with singles, or couples without children in Asia, according to a report by Euromonitor. In fact, it says disposable income per household from 1995 to 2010 grew 13.2 percent in the U.S., while in China it surged 230 percent.
Mark Konyn, Chief Executive of Cathay Conning Asset Management says Asia's risk-taking also has to do with attitudes. “In a Western context, taking risk is often viewed as speculation, rather than investment. In Asia’s high growth economies, investors typically look for higher return opportunities and tend to have shorter time horizons.”
Shan Han, a sales trader at IND-X securities adds that inflation is another factor. He says “higher inflation has also meant that hoarding cash has not been a good strategy for savings because of negative real deposit rates,” prompting Asian consumers to seek higher returns.
Han cites Hong Kong as an example. During most of the 1990s, annual inflation averaged 8.5 percent, while 12-month bank deposit rates averaged 6 percent. That means investors who stashed their cash in the banks were losing 2.5 percent of their savings each year.
Within Asia, Hong Kong consumers tend to be the biggest risk takers. 55 percent of Hong Kong consumers are financial investors, outweighing the global average of 33 percent.
Rust says that has to do with “new money”. “First generation wealth holders tend to focus on capital growth, whereas second or third generation wealth holders tend to focus more on capital preservation,” he says.
That explains why a larger number of Asian consumers pick stocks as opposed to other asset classes such as precious metals and bonds. Almost three-quarters of respondents in Asia picked equities, even though they’re often seen as the riskiest assets class. In North America, only two-thirds picked stocks, and in Europe, less than half did.
( CNBC )
China opposes the comment, Liu said. U.S. State Department spokesman Mark Toner issued a statement yesterday encouraging China to publicly account for all those killed and “end the continued harassment of demonstration participants and their families.”
Yesterday, searches for “Shanghai Composite” were blocked from China’s most-used microblogging service after the stock index’s drop on the 23rd anniversary of the Tiananmen Square crackdown corresponded to the date of the event.China strictly prohibits references to the crackdown, in which hundreds of protesters were killed by troops, as part of the government’s censorship of websites, newspapers and television that bars criticism of the ruling Communist Party. This year, authorities are also trying to ensure a smooth leadership transition scheduled for later in 2012 and seeking stability after the suspension of Politburo member Bo Xilai.
The benchmark Shanghai Composite Index dropped by 64.89 (SHCOMP) points yesterday, matching the date on which Chinese authorities crushed student-led protests on June 4, 1989. Queries for “Shanghai Composite” on Sina Corp.’s Twitter-like Weibo service returned a message that said results can’t be displayed “in accordance with relevant laws, regulations and policies.”
“It’s difficult to orchestrate but the coincidence is just mind-boggling,” Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong, said in a phone interview yesterday.
Queries for “Shanghai Composite” on the website of Baidu Inc. (BIDU), China’s most-used Internet search engine, returned results that showed the index’s decline. Other websites including Sina’s financial news portal and that of China Finance Online Co. also carried stock market reports with the index’s drop in points.
“We didn’t see anything abnormal in the market,” said Chen Ji, spokesman for the Shanghai Stock Exchange. “We don’t have any further comment.”
Weibo Scrutiny
Sina’s Weibo service, with more than 300 million registered users, has been subject to increased scrutiny. The company, along with rival Tencent Holdings Ltd. (700), were ordered to disable the comment function on their microblog services for 72 hours in March after authorities detained six people accused of spreading rumors of a coup attempt in Beijing.
Cathy Peng, a Beijing-based spokeswoman for Sina, didn’t immediately answer calls to her office after normal work hours.
In December, China began requiring microblog users in cities including Beijing, Guangzhou and Shenzhen to register their real names. That rule will be expanded to other regions, Wang Chen, minister of the State Council Information Office, said in January.
The benchmark Shanghai Composite Index dropped by 64.89 (SHCOMP) points yesterday, matching the date on which Chinese authorities crushed student-led protests on June 4, 1989. Queries for “Shanghai Composite” on Sina Corp.’s Twitter-like Weibo service returned a message that said results can’t be displayed “in accordance with relevant laws, regulations and policies.”
“It’s difficult to orchestrate but the coincidence is just mind-boggling,” Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong, said in a phone interview yesterday.
Queries for “Shanghai Composite” on the website of Baidu Inc. (BIDU), China’s most-used Internet search engine, returned results that showed the index’s decline. Other websites including Sina’s financial news portal and that of China Finance Online Co. also carried stock market reports with the index’s drop in points.
“We didn’t see anything abnormal in the market,” said Chen Ji, spokesman for the Shanghai Stock Exchange. “We don’t have any further comment.”
Weibo Scrutiny
Sina’s Weibo service, with more than 300 million registered users, has been subject to increased scrutiny. The company, along with rival Tencent Holdings Ltd. (700), were ordered to disable the comment function on their microblog services for 72 hours in March after authorities detained six people accused of spreading rumors of a coup attempt in Beijing.
Cathy Peng, a Beijing-based spokeswoman for Sina, didn’t immediately answer calls to her office after normal work hours.
In December, China began requiring microblog users in cities including Beijing, Guangzhou and Shenzhen to register their real names. That rule will be expanded to other regions, Wang Chen, minister of the State Council Information Office, said in January.
"Indonesia looks like it has hit the sweet spot, whereas India is nursing a headache from its latest boom," says Frederic Neumann, Co-Head of Asian Economic Research at HSBC.
While the two economies aren't similar in terms of size, with India's population of 1.2 billion and Indonesia's at 240 million, the countries share many similarities, leading to comparisons. Both have a burgeoning consumer base and are democracies with an investment grade rating.
India's economy has hit a rough spot with the slowest pace of growth in three years with the government unable to deliver on economic reforms. On the other hand, Indonesia has won favor with investors over the past few years.
That's leading Neumann and others to call for Indonesia to be included in the lineup of top global emerging markets. "The term BRICs really misses out on some of the key developments of our time. Indonesia has solid public finances, strong growth, a burgeoning consumer market, and plenty of resources to keep the economy afloat for many years," says Neumann.
On the other hand, India, according to Goldman Sachs' Jim O'Neill, the man who coined the term in 2001, is the BRIC that has disappointed. Late last year O'Neill said that India's poor record on productivity, foreign direct investment (FDI) and policy reform had made it the most disappointing among the four biggest developing economies - Brazil, Russia, India and China.
For example, India's fiscal deficit target of 5.1 per cent is wider than those of its BRIC peers. Its forecast deficit is more than four times Brazil's estimated 2012 budget gap of 1.2 per cent of output.
"It is difficult to see how India can turn around in the short term. It could in the next couple of years, but that is an eternity from investors' point of view, " says Neumann.
He adds that investors have already voted with their feet taking money out of India. The latest evidence of this was in the month of April when offshore investors withdrew some USD 403 million out of Indian equities and bonds, according to Reuters data.
While it is difficult to estimate how much of India's loss has been Indonesia's gain, market watchers say many investors have been increasingly looking at Indonesia as an alternative to India.
"To a large extent investor interest has moved to Indonesia," Robert Prior-Wandesford, Director, Asian Economics at Credit Suisse told CNBC. "Indonesia's equity market is hugely better than that of India and in part at the cost of India."
While the Bombay Stock Exchange's Sensex was the worst performing major global index in 2011 falling almost 25 per cent, the Jakarta Composite Index gained over three percent.
Besides delivering better returns, Indonesia is also catching up with India when it comes to economic growth. India's gross domestic product (GDP) is expected to expand at just under 7 per cent in the current fiscal year, which began April 1, while Indonesia is expected to deliver 6 to 7 per cent growth over the next couple of years, say analysts.
Even on trade, Indonesia scores over India. According to brokerage CLSA's latest forecast Indonesia's current account deficit in 2012 will be just 0.8 per cent of GDP, while India's will come in at around 3.9 per cent.
Rajeev Malik, Senior Economist at CLSA, says in Indonesia's case, net Foreign Direct Investment (FDI) will offset the current account deficit. In India's case, he points out, an estimated net FDI inflow of USD 15-20 billion will be well short of the current account deficit.
"They are doing better although they are not as big an economy as India," he says.
Credit Suisse's Wandesford says Indonesia reminds him of India three to four years ago, when there was a huge euphoria over the growth opportunity it offered foreign investors and companies. "In 2005-2008 India could do no wrong, now it is Indonesia."
India, which was awarded an investment grade rating by Standard and Poor's in 2007 is now under threat of losing it, with the ratings agency last month downgrading its credit outlook to negative. By contrast, both Fitch and Moody's upgraded Indonesia to investment grade in December and January, respectively.
Size matters
But despite the growing pessimism around India, most experts feel that it is not time yet to write off a country of a billion-plus people, if on nothing else than its sheer size.
Some argue that while there is a case for Indonesia to join the BRICs, it shouldn't be at the cost of India as they both have different comparative advantages. While one is a commodity economy, the other is a services oriented one and an investor, for example, can't completely replicate his menu of Indian stocks in Indonesia, say analysts.
"BRIC investors have a 20-year horizon and India will finally deliver in the long term," says Neumann.
As the uncertainty about Greek political situation and probability of second time polls has darkened the outlook of stock markets. Meanwhile US Economic growth left steam as stimulus faded. Hiring was subdued after first quarter jump and earning season is already over. Markets will now start focusing on Macro Economic fundamentals and start reacting according to it.
In Asia, Markets were under performers compared to US since April, although Shanghai Index has started outperforming since few weeks as analysts betting on economy rebound.
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| Bank of China |
If we look at the policy action that was announced today that the People's Bank of China cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to add to the roughly 800 billion injected in two previous 50 bps cuts since the government tilted its policy stance towards growth in October.
The move came after data on Friday showed the economy weakening, not recovering, from its slowest quarter of growth in three years. Industrial production growth slowed sharply in April and fixed asset investment — a key growth driver — hit its lowest level in nearly a decade, confounding economists expecting signs of a rebound in Q2 data.
Now question is the move should be taken as positive or may be more negative to the outlook of Chinese economic growth? If we see that more liquidity to flow in as a positive indicator but will it be sufficient to lift the industrial production and growth or it is still conservative step than what actually needed to boost economy as Inflation fear dampening the developing economies to free up capital.
View full article on the link
The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall
Tensions in the Middle East are likely to keep oil prices elevated in the near future despite recent declines. Most observers don't expect the U.S.-Iran standoff to escalate into conflict. Even so, it has already begun to hurt economically. A widely expected weak year for economic growth now has the potential to worsen. A further large increase in crude oil prices would adversely affect most Asia-Pacific economies. If prices stay above US$150 for more than a year, some sovereigns in the region could be downgraded.
In a move that will surely shock, shock, the monetary purists out there, the Bank of Japan has just gone and done what we predicted back in May 2011, with the first of our "Hyprintspeed" series articles: "A Look At The BOJ's Current, And Future, Quantitative Easing" (the second one which discussed the imminent advent of the ¥1 quadrillion in total debt threshold was also fulfilled three weeks ago). So just what did the BOJ do? Why nothing short of join the ECB, the BOE, and the Fed (and don't get us started on those crack FX traders at the SNB) in electronically printing even more 1 and 0-based monetary equivalents (full statement here). From WSJ: "The Bank of Japan surprised markets Tuesday by implementing new easing policies and moving closer to an explicit price target, the latest sign of growing worries around the world about the ripple effects of the European debt crisis on the global economy. With interest rates already close to zero, the BOJ has relied in recent months on asset purchases to stimulate the economy. In Tuesday's meeting, the central bank expanded that plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion." The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips. As for gold, not a peep: as if the market has now priced in that the world's central banks will dilute themselves to death. Unfortunately, it is only at death, and the failure of all status quo fiat paper, that the real value of the yellow metal, whose metallic nature continues to be suppressed via paper pathways, will truly shine.
The WSJ explains the BOJ's stunning decision further:
Only one out of the 11 analysts polled by Dow Jones Newswires had predicted the BOJ to ease this week.
Most BOJ watchers had said that while there were concerns over the impact of the strong yen and the European debt crisis, neither financial nor economic conditions had worsened to levels that warranted immediate further action.
The BOJ policy board also revised the wording of its "understanding of price stability," saying now it has set a "price stability goal" of 2% or lower in the core consumer price index in the medium- to long-term and a goal of 1% growth for the time being. For calendar year 2011, Japan's core consumer price index—excluding food prices—was negative 0.3%.
The bank had come under criticism that its definition of price stability, the goal it seeks to achieve in its fight against deflation, was too convoluted and vague. Such attacks had increased in recent weeks after the U.S. Federal Reserve in late January adopted a more explicit price target.
Faced with a prolonged deflation, politicians have stepped up their calls on the BOJ to take fresh action, with some threatening to revise legislation to strip away the central bank's independence from the government.
First of all, don't get us started on inflation targeting. Or rather, get Dylan Grice started: he will tell you all about it, and then some.
And while we now really just can't wait to bring to our readers what the global central bank balance sheet will look like after February, when it takes into account the recent GBP50 billlion BOE expansion, the €500-€1000 billion European LTRO part Deux, and now the ¥10 trillion additional BOJ easing, here is what we said on the topic back in May of 2011.
"In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank's asset buying scheme by 5 trillion yen ($62 billion). While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month. "And loosen it will, because unfortunately as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse. Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks. Furthermore, as shown above, the BOJ needs not to buy securities outright: tinkering with the shadow economy in the form of the repo market will provide just as desirable an outcome… If, of course, said outcome is to see gold and silver continue on their relentless rise to new all time record highs. And/or higher. Because the only thing limiting the price of gold is price stupidity and the amount of paper money in existence. Both are infinite.
It's good to see that our May 2011 quote on what the only realy gating factor on the price of gold is has now been broadly absorbed in the asset management vernacular. And yes, once the market does realize what is happening, following the usual 6-8 week uptake period, expect another step function higher in precious metals, CME margin hikes notwithstanding (and the recent CME faux margin cut bull trap aside).
Finally, unlike our own Fed, at least the BOJ is not shy telling the world it is openly buying up REITs and ETFs. For some odd reason our boys over at Liberty 33 are still playing so coy they can only punch their equity trade tickets via Citadel.
In an effort to halt expansion of Japan's massive public debt, Japan's Prime Minister Seeks Doubling National Sales Tax.
Prime Minister Yoshihiko Noda said containing Japan's public debt load, the world's largest, is critical after Standard & Poor's downgraded credit ratings on France, Austria and seven other European nations.
Europe's fiscal situation "isn't a house burning on the other side of the river," Noda said on TV Tokyo Holdings Corp.'s program on Jan. 14. "We must have a great sense of crisis."
Noda reshuffled his cabinet last week, aiming to win support for doubling Japan's 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda's administration hadn't made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation's sovereign grade.
Japan's government, which has enjoyed borrowing costs that are around 1 percent, wouldn't be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.
'Worse and Worse'
Japan's finances are "getting worse and worse every day, every second," Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he's closer to lowering Japan's credit rating, he said it "may be right in saying that we're closer to a downgrade."
S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a "comprehensive approach" to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March's record earthquake.
The International Monetary Fund has said a gradual increase of Japan's sales tax to 15 percent "could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path."
No Winning Play for Japan
If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.
On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.
Massive Debt Rollover Problem
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
The prevailing popular opinion on Japan is that it has suffered two "lost decades" – implying minimal economic growth and falling asset prices , and is typically held as an example of a dire economic condition to try and avoid. While Japan has indeed suffered economically from the bursting of its bubble in 1990, and it faces some serious structural issues today, the popular perception does not quite hold up to closer scrutiny. Richard Koo (Nomura Research Institute) and Daniel Gross (Director of the Centre for European studies) have written on this topic and I summarise below their key arguments:
Daniel Gross:
-Japan has indeed had a low economic growth of 0.6% over the last decade when compared to a growth rate of 1.7% experienced by the US. However, a large part of Europe had similar growth rates over the last decade – notably Germany at 0.6%, Italy's at 0.2% - with only France and Spain performing a bit better.
-Additionally, comparing GDP growth rates can be misleading as they do not take demographics into account. The best method to compare growth rates of developed countries is the GDP per working-age population (WAP-defined as population aged 20-60) which measures the true productive potential of a country and how efficiently it has utilised that potential.
-On the basis of this measure, Japan's GDP/WAP growth rate has exceeded that of the US by about 0.5% per annum, and that of most of Europe. This is because Japan's working-age population has been declining by 0.8% while that of the US has be increasing by about the same rate.
-Japan should be held, not as example of stagnation, but rather of how to squeeze maximum growth from limited potential.
-Another indication that Japan has efficiently utilised its potential is its unemployment rate which has remained constant over the last decade (and never exceeded 5.5%) , while the unemployment rate in the US has approached 10%.
-A good rule of the thumb to estimate average long term GDP growth rates of the G-7 countries is to add 1% of productivity gains to the growth rate of the working-age population. As German and Italian working-age populations start to decline rapidly after 2015, they can be expected to face a Japan like scenario. By contrast, the US, UK and France should continue to experience growing (albeit slowly) working-age populations and there relatively higher GDP growth rates.
Richard Koo:
-Japan faced a severe balance sheet recession in 1990 with the bursting of its real estate and stock bubbles – the loss of wealth due to steep falls in real estate prices (down 87%) and stocks, was equivalent to 3 years of its 1989 GDP – by contrast, the US only lost one year of its 1929 GDP, in terms of wealth, during the Great Depression.
-With the ensuing massive deleveraging by the corporate sector by repayment of debt – equivalent to 6% of GDP - and household savings of 4% , Japan could have lost 10% of GDP every year like the US did during the Great Depression.
-However, Japan managed to avoid a depression due to its aggressive fiscal spending which managed to keep GDP above its 1990 peak and unemployment below 5.5% (see chart below) . The government spending maintained incomes in the private sector and allowed businesses and households to pay down debt .
- The government cumulatively borrowed about 460 trillion yen (92% of its GDP) from 1990-2005 to save a potential loss of GDP of about 2,000 trillion yen (assuming GDP would have gone back to its pre-bubble 1985 peak without government action). This happened without crowding out of the private sector, inflation or high interest rates as the private sector continued to deleverage until 2005.
I above analysis is compelling- Japan has managed to do quite well despite some serious headwinds-foremost among them being their declining working-age population and a lack of natural resources. They are an extremely egalitarian society, with a rich cultural history, and continue to enjoy comfortable living standards and a high life expectancy – perhaps something for all developed nations to aspire towards rather than decry!
Year in Review and Predictions for 2012 :
Have provided below charts (via Macromon) which illustrate 2011 performances for a range of major equity markets as well as some bonds, currencies and commodities. Following a simplistic (yet surprisingly accurate) method of predicting performance for the year ahead based on the "reversal of fortunes" principle, it would suggest out-performances by the following asset classes in 2012:
India, China, Japan, Brazil, Hong Kong, France, Germany and Commodities.
On gold:
In the words of the 85 year old market veteran and doyen of newsletter writers – Richard Russell:
"Below are the last day of the year quotes for gold.
2000-$273.60
2001-$279.00
2002-$348.20
2003-$416.10
2004-$438.40
2005-$518.90
2006-$638.00
2007-$838.00
2008-$889.00
2009-$1,096.50
2010-$1,421.40
2011 -$1,566.80
2001-$279.00
2002-$348.20
2003-$416.10
2004-$438.40
2005-$518.90
2006-$638.00
2007-$838.00
2008-$889.00
2009-$1,096.50
2010-$1,421.40
2011 -$1,566.80
"This year's close for gold marks the 11th year for a higher year-end gold closing. To my knowledge this is the longest bull market of any kind in history in which each year's close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history.
As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.
They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.
Weakness Has Emerged In The Property Market
And The Chinese Financing System And Construction Industry Links Have Become Increasingly Complex
Conclusion – The situation in China is worrying to say the least. Short-term indicators are weakening as past monetary tightening starts to bite and the export model is threatened once again by the risk of recession in Europe and the US. Data from the real estate industry show a significant deterioration, with a clear break in the confidence that real estate prices always go up. The debt burden of local governments and large ongoing deficits should prevent a large stimulus plan similar to that of 2008. Monetary easing could bring some relief, although we believe that Beijing lost some control of the financing system through the shadow banking.
With the Dow rallying more than 400 points and gold trading up over $30, near the $1,750 level, today King World News has released the eagerly anticipated interview with legendary investor Marc Faber, author of the Gloom Boom and Doom Report. Faber warned KWN that the Chinese economy may crash and noted this will have a huge impact on various economies and markets, "Well if we define a bubble as a period of excessive growth and artificially low interest rates, then China had a huge bubble. Usually bubbles are not deflated by a soft landing, but by a hard landing and this concerns me, actually, much more than the European situation."
Marc Faber continues:
"The European situation is basically hopeless, but it will lead to money printing. In China, if the economy slows down meaningfully or if there is a crash, it will have a huge impact on the demand from China for raw materials, for commodities. It will impact Australia, Africa, the Middle-East and Latin America.
If these countries are faced with declining commodity prices, especially industrial commodities such as copper, nickel, oil and so forth, then they will buy less from China and we will have a vicious spiral on the downside.
I'm sure the economy (of China) is softer than official statistics would suggest and probably the government will start to print money at some point. So maybe stocks will rebound here because of money printing, but again, it won't help the economy….
When asked about a sputter or collapse in the Chinese economy, Faber stated, "I live in Asia and all I can say is I observe a meaningful slowdown in business activity recently and increasing corporate earnings that disappoint."
When asked if he was aware of capital flight out of China, Faber replied, "There's a huge capital flight, there's no question about this."
When asked why the Chinese are panicking to move their money out of China, Faber responded, "That is a very good question because, you see, the bullish analysts will tell you will tell you, 'Oh, if the Chinese economy slows down they are going to print money and lower interest rates and ease monetary conditions.'
But if that happens, then obviously capital flight will increase, especially if, unlike all of the expectations, the Yuan or the Chinese RMB begins to weaken rather than to strengthen against the US dollar. So that could actually accelerate the decline or let's say capital outflows and declining asset values in China.
Faber had this to say about the situation in the West, "Well, as you know we have some deflationists, they think the whole debt bubble will collapse and I believe that will eventually be the case. But between now and then there will be QE3, 4, 5, 6 and so forth and in Europe they will print money."
News Highlights - Week of 15 - 19 August 2011
Malaysia's real GDP growth moderated to 4.0% year-on-year (y-o-y) in 2Q11 from a 4.9% expansion in the previous quarter. Private consumption increased 6.4% y-o-y in 2Q11, while public consumption growth stood at 4.0% y-o-y. Gross domestic capital formation expanded 3.2% y-o-y in 2Q11. Growth in the manufacturing and construction sectors moderated in 2Q11 to 2.1% and 0.6% y-o-y, respectively. Meanwhile, consumer price inflation in Malaysia eased slightly to 3.4% y-o-y in July from 3.5% in the previous month, with food and transport costs rising 4.9% and 4.8%, respectively. In Singapore, growth in retail sales accelerated to 10.9% y-o-y in June from 9.6% in May. Thailand's real GDP grew 2.6% y-o-y in 2Q11, compared with revised 3.2% growth in 1Q11.
* The People's Republic of China (PRC) raised a total of CNH15 billion in the Hong Kong, China offshore market last week from its sale of (i) CNH6 billion worth of 3-year bonds, (ii) CNH5 billion worth of 5-year bonds, (iii) CNH3 billion of 7-year bonds, and (iv) CNH1 billion worth of 10-year bonds. The average coupon rate of the bonds was lower by 225 basis points compared to onshore yields. Also last week, the PRC's Vice-Premier Li Keqiang visited Hong Kong, China and expressed support for the development of the CNH market.
* Japan's merchandise exports dropped 3.3% y-o-y in July amid the yen's appreciation and weak demand from the PRC and the United States. Singapore's non-oil domestic exports fell 2.8% y-o-y in the same month.
* Overseas remittances to the Philippines rose 7.0% y-o-y to USD1.7 billion in June, after climbing 6.9% in May, on the back of sustained foreign demand for Filipino workers. The Philippines posted a balance of payments surplus of USD1.3 billion in July, compared with USD222 million in June.
* Foreign direct investment (FDI) in the PRC rose 18.6% y-o-y to USD69.2 billion in the first 7 months of 2011, including a 19.8% y-o-y increase in July.
* In the PRC last week, Beijing Energy Investment raised CNY2 billion from a dual-tranche bond sale. Last week in the Republic of Korea, Shinhan Financial Group priced KRW230 billion worth of dual-tranche bonds; Hanjin Heavy Industries issued KRW200 billion worth of 3-year bonds; and Meritz Finance Holdings raised KRW200 billion from a dual-tranche bond sale. Meanwhile, the Bank of Thailand (BOT) plans to offer THB50 billion of savings bonds this month, while Indonesia mandated three banks for its planned USD-denominated global sukuk (Islamic bond), which is expected to be launched at end-September or in early October.
* Government bond yields fell last week for all tenors in Indonesia and the Philippines, and for most tenors in Malaysia, Singapore and Viet Nam. Yields rose for most tenors in Thailand while yield movements were mixed in the PRC; Hong Kong, China; and the Republic of Korea. Yield spreads between 2- and 10- year maturities widened in Indonesia, while spreads narrowed in most other emerging East Asian markets.
* Finally, some of the more interesting economic data due this week include consumer price inflation for Japan, Singapore, and Viet Nam; the 1-day repurchase rate for Thailand; exports for Hong Kong, China and Viet Nam; and the current account balance for the Republic of Korea.
Ratings agency Standard & Poor's today cautioned that it could lower the sovereign ratings of countries like India, Japan and Malaysia, which are still to come out of the economic meltdown of 2008.
"The implications for sovereign creditworthiness in the Asia-Pacific would likely be more negative than previously experienced and a larger number of negative rating actions would follow," S&P said in its report on Asia-Pacific Sovereigns.
"Fiscal capacities of Japan, India, Malaysia, Taiwan and New Zealand have shrunk relative to pre-2008 level," it said, adding that these countries continue to bear the scars of the downturn.
The governments, it said, would be required to use their own revenue streams to support their economies and financial sector once again.
It further said that if a renewed slowdown comes, it would create a deeper and more prolonged impact.
At the time of the global financial crisis in 2008, several countries, including India, had rolled out stimulus packages facilitating monetary expansion and lower taxes to mitigate the impact of the slowdown.
News Highlights - Week of 1 - 5 August 2011
Standard and Poor's downgraded its sovereign rating for the US government last week from AAA to AA+. In response, government bond yields fell in most Asian bond markets. Yields fell for all tenors in Indonesia and the Republic of Korea, and for most tenors in Hong Kong, China; Malaysia; the Philippines; Singapore; and Thailand, although yields rose for most tenors in the PRC and Viet Nam. Yield spreads between 2- and 10- year maturities widened in the PRC, Indonesia, the Republic of Korea and Thailand, while spreads narrowed in most other emerging East Asian markets.
Consumer price inflation eased in Indonesia and the Philippines in July, while creeping marginally higher in Thailand. Indonesia's consumer prices increased 4.6% year-on-year (y-o-y) in July, down from a 5.5% rise in June. In the Philippines, consumer price inflation eased slightly to 5.1% y-o-y in July from 5.2% in June, based on 2006 inflation series data. Slower annual price hikes in energy costs and food and non-alcoholic beverages contributed to the downtrend. Meanwhile, Thailand's consumer price inflation rose incrementally higher to 4.08% y-o-y in June from 4.06% in May on the back of higher food and energy prices.
Total bank deposits in Hong Kong, China (LCY and FCY) fell 0.9% month-on-month (m-o-m) to HKD7.2 trillion, mainly due to the decline in Hong Kong dollar deposits, which shrank 1.6% to HKD3.62 trillion. Hong Kong, China's M2 money supply also fell 1.3% m-o-m in June. Japan's monetary base grew 15.0% y-o-y in July to reach JPY113.7 trillion.
Indonesia's economy expanded 6.5% y-o-y in 2Q11, growing at the same pace it did in 1Q11. Indonesia's exports grew 49.3% y-o-y to USD18.4 billion in June. In Malaysia, export growth rose to 8.6% y-o-y in June from 5.4% in May. Singapore's purchasing managers' index (PMI) fell to 49.3 in July, after a posting 50.4 in June, due to a slowdown in global manufacturing.
Issuance of asset-backed securities (ABS) in the Republic of Korea soared 34.1% y-o-y to KRW14.7 trillion in 1H11, led by Korea Housing Finance Corporation. Net foreign investment into LCY-denominated bonds in the Republic of Korea stood at KRW2.9 trillion in July-the highest monthly figure in the first 7 months of the year. Investments from Thailand and Singapore boosted the inflows, while the largest net outflows went to France.
The Philippines incurred a budget deficit of PHP17.2 billion in 1H11, which was much lower than the programmed amount of PHP152.1 billion, as the government limited spending while revenue collections by the Bureau of Internal Revenue (BIR) improved. The national government posted a fiscal deficit of PHP7.7 billion in the month of June.
China Resources Land issued USD250 million worth of 5-year senior notes with a coupon of 4.625%. In Hong Kong, China, the government issued 10-year Hong Kong Special Administrative Region (HKSAR) government bonds worth HKD2.5 billion and carrying a coupon of 2.46%. Indonesian wood processing firm Sarana Bina Semesta Alam issued 5-year USD10 million notes with a coupon of 6.0%. National Agricultural Cooperative Foundation in the Republic of Korea priced USD500 million of 5.5-year bonds with a coupon of 3.50%.
News Highlights - Week of 18 - 22 July 2011
Consumer price inflation in Malaysia accelerated to 3.5% year-on-year (y-o-y) in June, the highest level in 27 months, on the back of rising food and transportation prices. On a month-on-month (m-o-m) basis, consumer price inflation stood at 0.3% in June. In Hong Kong, China, the composite consumer price index rose 5.6% y-o-y in June, after climbing 5.2% in May, primarily driven by increasing food and housing rental prices.
* The Bank of Korea has restricted foreign exchange agencies' investments in foreign-currency-denominated bonds issued domestically by local enterprises for the purpose of Korean won financing, effective 25 July.
* Last week, Korea Housing Finance Corporation priced a USD500 million 5.5-year covered bond at a coupon rate of 3.50% and Samsung Securities issued a KRW300 billion 3-year bond at a coupon rate of 4.33%. In the Philippines, power conglomerate First Gen Corporation offered PHP10 billion worth of perpetual preferred shares last week with a dividend rate of 8% per annum. In Thailand, real estate developer Sansiri issued a THB1 billion 5-year bond carrying a coupon rate of 5.4%.
* In Singapore last week, water treatment company Hyflux issued a SGD100 million 5-year bond carrying a coupon rate of 3.5%; real estate developer Joynote issued a SGD180 million 5-year bond and a SGD320 million 7-year bond at coupon rates of 2.585% and 3.408%, respectively; and Singapore's Housing Development Board sold a SGD600 million 10-year bond at a coupon rate of 2.815%.
* The Export–Import Bank of China plans to issue CNY24 billion worth of bonds in two tranches. The China Three Gorges Project plans to issue a 3-year CNY5 billion medium-term note. In Indonesia, Medco Energi Internasional plans to auction USD50 million–USD100 million worth of bonds, while Permodalan Nasional Madani and Nippon Indosari Corpindo plan to sell IDR300 billion and IDR500 billion worth of bonds, respectively. Meanwhile, the Treasury Department of Thailand announced its plan to issue a THB3 billion securitized bond to finance property development projects.
* Japan recorded a trade surplus of JPY70.7 billion in June after posting a deficit of JPY855.8 billion in May. Singapore's non-oil domestic export growth eased to 1.1% y-o-y in June from 7.6% in May, due to lower shipments of electronic goods and declining sales of pharmaceutical products. The Philippines' balance of payments surplus soared to USD5 billion in 1H11 on the back of strong portfolio inflows and overseas Filipino remittances.
* Indonesia's car sales fell 0.3% y-o-y in June, while domestic motorcycle sales rose 0.8% y-o-y. In Thailand, total car sales decreased 0.4% y-o-y in June, following a 10.2% fall in May. In Japan, department store sales rose 0.3% y-o-y in June after registering a 2.4% decline in May.
* Government bond yields fell last week for most tenors in Indonesia, the Philippines and Thailand, while yields rose for all tenors in the People's Republic of China (PRC), the Republic of Korea, and Viet Nam and for most tenors in Malaysia. Yield movements were mixed in Hong Kong, China; and Singapore. Yield spreads between 2- and 10- year maturities widened in Hong Kong, China; Indonesia; Malaysia; Singapore; and Thailand, while spreads narrowed in most other emerging East Asian markets.
News Highlights - Week of 4 - 8 July 2011
The People's Republic of China (PRC) raised its policy rates to curb inflation for the third time this year—by 25 basis points (bps) each—to 3.5% for the 1-year deposit rate and 6.56% for the 1-year lending rate, effective 7 July. Meanwhile, Bank Negara Malaysia kept its policy rate at 3.0% but hiked its statutory reserve requirement ratio by 100 bps to 4.0%, effective 16 July. Viet Nam slashed its repurchase rate by 100 bps to 14.0% effective 4 July, after a series of rate hikes earlier this year.
* PRC's consumer price inflation accelerated to 6.4% year-on-year (y-o-y) in June – the highest recorded – on the back of rising food prices. Consumer price inflation in the Philippines surged to 4.6% y-o-y in June, the highest level in 26 months, driven by price increases in water, electricity, gas and oil, food products, and education fees. In the Republic of Korea, growth in producer price inflation was constant at 6.2% y-o-y in both May and June.
* Net foreign investments in the Republic of Korea's local currency (LCY) bonds stood at KRW2.2 trillion in June, as net bond purchases for the month widened to KRW8.5 trillion, which eclipsed maturity redemptions of KRW6.4 trillion. However, net foreign investment in Korean LCY bonds was down in June from KRW2.6 trillion in May.
* Thailand's Public Debt Management Office has approved five foreign banks to issue THB-denominated bonds up until 31 December. First Gulf Joint Stock Company plans to issue its debut bond worth THB6 billion, while Credit Agricole Corporate and Investment Bank, ING Bank, and Export–Import Bank of Korea were granted permission to issue THB10 billion each. Meanwhile, Lloyds TSB Bank was given approval to issue bonds up to a total of THB6 billion.
* The PRC's exports grew 17.9% y-o-y in June, from 19.4% in May while import growth slowed to 19.3% y-o-y in June, from 28.4% in May. Trade surplus grew to a 7-month high in June at USD22.3 billion. Malaysia's export growth eased to 5.4% y-o-y and imports rose 5.6 % in May. In the first 5 months of the year, total exports increased 6.2% y-o-y to MYR279.2 billion and total imports rose 10.3% to MYR228.0 billion. As a result, Malaysia's trade surplus in January–May stood at MYR51.3 billion.
* Last week, Shanghai International Port issued CNH3 billion of 5-year callable bonds to yield 5.05%. Indonesia's Bank Sumut sold IDR600 billion of 5-year bonds with a coupon of 10.125% and IDR400 billion of 7-year subordinated bonds with a coupon of 11.35%. Korea Hydro and Nuclear Power Co. sold USD500 million of 10-year bonds. Korea Gas priced a JPY30 billon samurai bond. Korea Land & Housing Corp. issued KRW250 billion of 3.5-year bonds at a coupon of 4.27%. Hyundai Merchant Marine raised KRW240 billion from the sale of 5-year bonds at a 5.8% coupon. Thailand issued THB40 billion of 10-year inflation-linked bonds at a coupon of 1.2%. Asian Property Development issued THB1.5 billion of 3.5-year senior notes that carry a step-up coupon of 4.5% in the third year and 5.8% in the fourth year.
* Government bond yields fell last week for all tenors in Indonesia and for most tenors in the PRC, the Philippines, Singapore and Viet Nam. Yields rose for all tenors in Hong Kong, China and for most tenors in the Republic of Korea, Malaysia and Thailand. Yield spreads between 2- and 10- maturities widened in the PRC; Hong Kong, China; the Philippines; Thailand; and Viet Nam, while spreads narrowed in the rest of East Asian markets.
News Highlights - Week of 11 - 15 July 2011
The People's Republic of China's (PRC) gross domestic product (GDP) expanded 9.5% year-on-year (y-o-y) in 2Q11, down slightly from 9.7% in 1Q11, driven primarily by growth in manufacturing and services. Meanwhile, Singapore's GDP growth slowed significantly to 0.5% y-o-y in 2Q11, according to advanced estimates released by the Ministry of Trade and Industry. This reflected a slowdown in many sectors, in particular manufacturing, which contracted 5.5% y-o-y in 2Q11 versus growth of 16.4% in 1Q11.
* The PRC's industrial production grew 15.1% y-o-y in June after growth of 13.3% in May. In the Republic of Korea, sales growth for key department stores fell to 8.2% y-o-y in June from 8.7% in May, while major discount stores' sales rose to 2.7% in June from 2.4% in May. Malaysia's industrial production index dropped 5.1% y-o-y in May, while growth in manufacturing sales slowed to 8.0% in May from 15.2% in April.
* The Bank of Thailand (BOT) raised its 1-day repurchase rate by 25 basis points to 3.25% in its Monetary Policy Committee meeting on 13 July. On 12 July, Bank Indonesia's (BI) Board of Governors decided to keep its reference rate steady at 6.75%. The Bank of Korea's (BOK) Monetary Policy Committee also decided to maintain its base rate-the 7-day repurchase rate-at 3.25% in its 14 July meeting. The Bank of Japan (BOJ) unanimously decided last week to keep the uncollateralized overnight call rate between zero and 0.1 percent.
* In the PRC, M2 money supply growth accelerated in June to 15.9% y-o-y from 15.1% in May. The growth rate in Japan's M2 money supply climbed to a 12-month high of 2.9% y-o-y in June. In the Philippines, the M3 money supply expanded 8.0% y-o-y in May, compared with 7.3% growth in April. Meanwhile, M2 money supply growth for the Republic of Korea slowed to 3.7% from 3.9% in the previous month.
* The Securities Commission of Malaysia issued revised guidelines for private debt securities and sukuk (Islamic bonds) last week. The revised guidelines streamline the approval process and time-to-market for the issuance of corporate bonds and sukuk. The revised guidelines also remove the mandatory rating requirement for selected issues or offers, and provide for greater disclosure of relevant information for debenture holders.
* The Philippine Bureau of the Treasury completed its sixth domestic bond exchange program last week, garnering the highest level of participation to date. A total of PHP299.4 billion worth of bonds were offered in exchange for new 10.5- and 20-year bonds.
* The PRC's Intime Department Store issued CNH1 billion worth of 3-year bonds last week. In the Republic of Korea, Kookmin Bank issued USD300 million of 5.5-year bonds. Singapore Telecommunications (SingTel) issued SGD250 million of 5-year bonds, while the State Railway of Thailand issued THB1 billion of 12-year bonds.
* Government bond yields fell last week for all tenors in the Republic of Korea, and for most tenors in Hong Kong, China; Malaysia; Singapore; and Viet Nam. Yields rose for all tenors in Thailand, and for most tenors in the PRC, Indonesia, and the Philippines. Yield spreads between 2- and 10- year maturities widened in Indonesia, Thailand and Viet Nam, while spreads narrowed in most other emerging East Asian markets.
Until 1990, Japan was the most successful large economy in the world. Almost nobody predicted what would happen to it in the succeeding decades. Today, people are yet more in awe of the achievements of China. Is it conceivable that this colossus could learn that spectacular success is a precursor of surprising failure? The answer is: yes.
Japan's gross domestic product per head (at purchasing power parity) jumped from a fifth of US levels in 1950 to 90 per cent in 1990. But this spectacular convergence went into reverse: by 2010, Japan's GDP per head had fallen to 76 per cent of US levels. China's GDP per head jumped from 3 per cent of US levels in 1978, when Deng Xiaoping's "reform and opening up" began, to a fifth of US levels today. Is this going to continue as spectacularly over the next few decades or could China, too, surprise on the downside?
It is easy to make the optimistic case. First, China has a proved record of success, with an average rate of economic growth of 10 per cent between 1979 and 2010. Second, China is a long way from the living standards of the high-income countries. Relative to the US, its GDP per head is where Japan's was in 1950, before a quarter century of further rapid growth. If China matched Japan's performance, its GDP per head would be 70 per cent of US levels by 2035 and its economy would be bigger than those of the US and European Union, combined.
Yet counter-arguments do exist. One is that China's size is a disadvantage: in particular, it makes its rise far more dramatic for the demand for resources than anything that has gone before. Another is that the political effects of such a transformation might be disruptive for a country run by a Communist party. It is also possible, however, to advance purely economic arguments for the idea that growth might slow more abruptly than most assume.
Such arguments rest on two features of China's situation. The first is that it is a middle-income country. Economists increasingly recognise a "middle-income trap". Thus, sustaining rapid increases in productivity and managing huge structural shifts as the economy becomes more sophisticated is hard. Japan, South Korea, Taiwan, Hong Kong and Singapore are almost the only economies to have managed this feat over the past 60 years.
Happily, China has close cultural and economic similarities with these east Asian successes. Unhappily, China shares with these economies a model of investment-led growth that is both a strength and a weakness. Moreover, China's version of this model is extreme. For this reason, it is arguable that the model will cause difficulties even before it did in the arguably less distorted case of Japan.
Premier Wen Jiabao has himself described the economy as "unstable, unbalanced, unco-ordinated and ultimately unsustainable". The nature of the challenge was made evident to me during discussions of the 12th five year plan at the China Development Forum 2011 in Beijing in March. This new plan calls for a sharp change in the pace and structure of economic growth. In particular, growth is forecast to decline to just 7 per cent a year. More important, the economy is expected to rebalance from investment, towards consumption and, partly as a result, from manufacturing towards services.
The question is whether these shifts can be managed smoothly. Michael Pettis of Peking University's Guanghua School of Management has argued that they cannot be. His argument rests on the view that in the investment-led growth model, repression of household incomes plays a central role by subsidising that investment. Removing that repression – a necessary condition for faster growth of consumption – risks causing a sharp slowdown in output and a still bigger slowdown in investment. Growth is driven as much by subsidised expansion of capacity as by the profitable matching of supply to final demand. This will end with a bump.
Investment has indeed grown far faster than GDP. From 2000 to 2010, growth of gross fixed investment averaged 13.3 per cent, while growth of private consumption averaged 7.8 per cent. Over the same period the share of private consumption in GDP collapsed from 46 per cent to a mere 34 per cent, while the share of fixed investment rose from 34 per cent to 46 per cent. (See charts.)
Professor Pettis argues that suppression of wages, huge expansions of cheap credit and a repressed exchange rate were all ways of transferring incomes from households to business and so from consumption to investment. Dwight Perkins of Harvard argued at the China Development Forum that the "incremental capital output ratio" – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.
If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results. The thesis advanced by Prof Pettis is that a forced investment strategy will normally end with such a bump. The question is when. In China, it might be earlier in the growth process than in Japan because investment is so high. Much of the investment now undertaken would be unprofitable without the artificial support provided, he argues. One indicator, he suggests, is rapid growth of credit. George Magnus of UBS also noted in the FT of May 3 2011 that the credit-intensity of Chinese growth has increased sharply. This, too, is reminiscent of Japan as late as the 1980s, when the attempt to sustain growth in investment-led domestic demand led to a ruinous credit expansion.
As growth slows, the demand for investment is sure to shrink. At growth of 7 per cent, the needed rate of investment could fall by up to 15 per cent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being an growth engine, investment could become a source of stagnation.
The optimistic view is that China's growth potential is so great that it can manage the planned transition with ease. The pessimistic view is that it is hard for a country investing half of GDP to decelerate smoothly. I expect the transition to slower economic growth and greater reliance on consumption to be quite bumpy. The Chinese government is skilled. But it cannot walk on water. The water it is going to have to walk on over the next decade is going to be choppy. Watch out for the waves.
