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Conclusion: We maintain our assertion that it won’t pay to be long of Chinese equities or industrial and/or energy commodities/equity plays using the prospect of China easing monetary and/or fiscal policy as the predominant catalyst. Moreover, we believe China is quite likely to disappoint growing consensus expectations for broad-based easing, absent a major deflationary shock. Chinese growth remains structurally constrained as result of past policy mistakes that are unlikely to be repeated again – just three years later.



  • Equities: Asian equities closed down -2.7% wk/wk on a median basis… South Korea led decliners (down -6.5%);
  • FX: Asian currencies are down -0.3% wk/wk vs. the USD on a median basis… the Korean won (KRW) and Aussie dollar (AUD) led decliners, falling -1.8% apiece… YTD callout: the Indian rupee is down -15.2% vs. the USD vs. a median decline of -2.9% for the region;
  • Fixed Income: 2yr sovereign debt yields were mixed-to-slightly up wk/wk, led by Philippines (up +16bps)… 10yr sovereign debt yields broadly fell wk/wk, led by Australia (down -16bps)… 30yr sovereign debt yields all declined, led by India (down -16bps)… sovereign yield curves as measured by 10yr-2yr spreads broadly tightened wk/wk, led by Philippines (down -28bps);
  • CDS: 5yr sovereign CDS traded +4.7% wider wk/wk on a median percentage basis, led by South Korea (+19bps or +12.4%);
  • Rates (swaps): 1yr O/S interest rate swaps were flat wk/wk on a median percentage basis… the downside was led by an outsized move in Vietnam (down -130bps) and the upside was capped by a sizeable move in Indonesia (up +40bps); and
  • Rates (interbank): O/N interbank rates were flat wk/wk on a median percentage basis a well… Australia’s S/T interbank market tightened the most (rates up +16bps).

Expanded price tables can be found at the bottom of this note.


Chinese equities, agree with our view that Chinese growth is: a) entering into the thralls of a 2yr-long slowdown; and b) unlikely to be meaningfully reflated via policy initiatives in 2012. We continue to wrestle with following the question internally: even if China eases, where does the additional liquidity flow through to from a growth perspective? Fixed asset investment (~half of GDP) remains under official assault by policymakers and China’s manufacturing and export base faces stiff headwinds from waning European and intra-regional demand. Unless China quickly alters its growth model away from pandering to property speculation and external demand, cutting rates and easing policy are highly unlikely to be as reflationary for the global economy as it was back in 2009. As we’ve seen domestically, central bank easing does not always equate to accelerating and sustainable growth.

Chinese stocks continue to agree with our general takeaways:

Weekly Asia Risk Monitor: Bulled-Up On China Easing Monetary and Fiscal Policy? - 1

Aggressive hedging of China’s currency is also supportive of our conclusions:

Weekly Asia Risk Monitor: Bulled-Up On China Easing Monetary and Fiscal Policy? - 2

The flow of hard capital in and out of China is supportive of our thoughts as well:

Weekly Asia Risk Monitor: Bulled-Up On China Easing Monetary and Fiscal Policy? - 3


The following regional callouts pick up where we left off in our 12/12 note titled: A Look Under the Hood at Asia’s Trade Data and Capital Flows:

Growth Slowing:

  • China: New loan growth slowed in Nov to +CNY562.2B MoM vs. +CNY586.8B prior… M2 money supply growth slowed in Nov to +12.7% YoY vs. +11.9% prior – the lowest rate of growth since May ’01! China’s Shanghai Composite Index is down over -30% from the Nov ’09 cyclical peak in M2 growth rates (near +30% YoY).
  • Hong Kong: Industrial production growth slowed in Oct to +0.2% YoY vs. +2% prior.
  • Japan: Confidence remains bleak on the troubled island nation, which remains in recession from a YoY perspective. Consumer confidence ticked down in Nov to 38.1 vs. 38.6 prior, dragging down department store sales growth in the process (-1.9% YoY in Nov vs. -0.5% prior)… Per the omnipotent Tankan Business Survey, large manufacturers’ confidence and outlook ticked down in 4Q to -4 (vs. 2 prior) and -5 (vs. 4 prior), respectively. All-industry CapEx guidance was more than halved, falling to +1.4% in 4Q…  Additionally, machine tool orders growth slowed in Nov to +15.9% YoY vs. +26% prior.
  • Japan: Slowing growth, both domestically and abroad, continues to be imputed into Japan’s highly-liquid sovereign debt market. The Sharpe Ratio for 10yr JGBs has risen +52% YTD to 3.32 (vs. -87% to 0.88 for 10yr German bunds). International investors are buying JGBs at the fastest pace in four years (+$57 billion YTD vs. +$91.2 billion in ’07) as relatively low volatility in both the yen and JGB markets increases their allure as a consensus “flight to safety” trade. The Bank of Japan begins a two-day board meeting tomorrow where they are expected by some to step up liquidity provisions.
  • India: A bombed-out Oct industrial production report (-5.1% YoY vs. 2% prior) exposed India’s YTD economic malaise to the financial media consensus. We view this as more of the same, having authored the bearish call across India’s various financial markets well over a year ago. India’s SENSEX Index (-25% YTD), the rupee (down -15.2% YTD vs. the USD), and 2yr sovereign yields (+74bps YTD vs. a median decline of -14bps across the region) all continue to paint a bearish outlook for the world’s 5th largest economy on a PPP basis.
  • South Korea: Discount and department store sales growth slowed in Nov to -0.5% YoY each, from +5.5% and +3.1%, respectively, in the month prior.
  • Australia: Westpac’s consumer confidence index dropped -8.4% MoM in Dec to 94.7.
  • New Zealand: Business PMI ticked down in Nov to 45.7 vs. 46.6… Westpac’s consumer confidence index plunged -9.6% MoM in Dec to 101.3.

King Dollar:

  • China: Monetary easing speculation continues to be supportive of China’s corporate credit market. The AAA yield spread over sovereign yields has tightened -17bps MTD to a five-month low of 176bps wide. Still, China’s corporate dollar bonds remain the worst performers in Asia for the YTD (down -5.7%). To the original point re: easing speculation, 2yr sovereign debt yields, 1yr O/S interest rate swaps, and O/N interbank rates are all trading below the PBOC’s benchmark 1yr household savings deposit rate at -64bps, -79bps, and -55bps, respectively.
  • China: Foreign direct investment growth slowed in Nov to -9.8% YoY vs. +8.8% prior – the lowest rate of growth since July ’09. The delta between E.U. FDI (up +0.3% YoY) vs. the U.S. (down -23% YoY) speaks volumes to which region is in greater need of tapping Chinese demand in order to supplement growth in 2012. Still, capital flight is what it is and this latest FDI data point does not help paint a rosy 2012 outlook for the global economy – very much in contrast with current Wall Street 1.0 consensus.
  • China: Easing speculation and capital flight continues to weigh on the Dim Sum bond market (yields up +382bps YTD) as investors demand greater risk premiums to offset the specter of slower gains in the yuan. China’s currency continues to face pressure in FX hedging markets: 1yr O/S forwards trade at a 1.2% discount to the O/S spot rate (widest spread since Mar ’09); 1yr offshore forwards trade at a 1.1% discount to the offshore spot rate.
  • India: International investors are adding to their holdings of rupee-denominated debt in Dec (another +$1.6 billion MTD to $23.8 billion). The inflows’ impact on the exchange rate is being overpowered by equity outflows and easy monetary policy out of the central bank. To that tune, the RBI has purchased $4.6 billion of sovereign debt in the secondary market since Nov 24th. Their decision to pursue Quantitative Guessing suggests to us that alleviating a liquidity crunch in the banking system appears to be the central bank’s primary objective for now – even more so than bringing down the 9%+ inflation dramatically impacting the lives of the ~828  million Indians living on less than $2 per day. In Dec, Indian banks are borrowing an average of 984 billion rupees ($18.6 billion) from the RBI’s repo facility – a 12-month high. The liquidity crunch has slowed rates of credit growth (down -680bps YTD to +17.6% YoY in Nov) and rupee-denominated corporate bond issuance (down -23% YoY to 1.49 trillion rupees YTD).
  • India: Per above, the RBI kept its benchmark policy rates on hold and implemented a scheme to support the rupee in the FX market (trading just above an all-time low vs. the USD). The new regulations prevent companies from speculating on the rupee by entering into multiple forward contracts on a singular transaction. Also, previously-canceled forward contracts can no longer be reactivated. While Governor Duvuuri Subbarao did confirm that a “rate cut is an event some way ahead”, his refusal to hike rates amid a currency crash is another indication that the tightening cycle has run its course in India – an event that has recently become supportive of India’s fixed income market (2yr sovereign debt yields down -45bps over the past month; 10yr yields down -52bps over the same duration).

Deflating the Inflation:

  • South Korea: Export and import prices slowed in Nov to +5.4% YoY (vs. +9.2% prior) and +11.8% YoY (vs. +16% prior), respectively.
  • Australia: Consumer inflation expectations slowed in Dec to +2.4% vs. +2.5% prior… trending down right alongside the RBA’s official projections and 5yr market breakeven rates (down -926bps peak-to-trough in the YTD to 2.2%). We remain the bears on the Aussie dollar over the intermediate term.

Sticky Stagflation:

  • Hong Kong: PPI accelerated in Oct to +9.6% YoY vs. +9% prior.


  • China: HSBC flash manufacturing PMI (85-90% of responses tallied) ticked up in Nov: 49 vs. 47.7.
  • Singapore: Retail sales (ex autos) growth accelerated in Oct to +8.6% YoY vs. +3.5% prior… export growth accelerated in Nov to +1.6% YoY vs. -16.3% prior.


  • China: Per Xinhua newspaper by way of unnamed government officials, China’s 2012 policy outlook is “progress amid stability”. The key takeaways from their statement: “policies will be fine-tuned as needed”; “… will continue to unswervingly implement real estate curbs”; “credit growth will be reasonable”; “… will step up management of local gov’t debt” (a huge step in the right direction from the current policy of willful blindness); “structural tax cuts will continue”; “… will speed-up construction of low-income housing”; and “a stable yuan exchange rate”. These statements rhyme with commentary out of Fan Gang, director of China’s National Economic Research Institute: “China is unlikely to enact a large stimulus package amid a healthy correction in economic growth.” Both [pseudo-official] outlooks are very much in line with what we’ve been telling clients to expect out of China over the past few months.
  • China: Executives at Shimao Property Holdings Ltd. and Glorious Property Holdings Ltd. are taking the other side of the government’s strong stance toward the property market and tempering of easing expectations, buying as much stock in their companies since 2008 – likely expecting a redo of the ‘08/’09  rally in Chinese property shares (+62.7% trough-to-peak). Like the much-larger developer Evergrande Real Estate Group Ltd. (NOT buying), we remain skeptical of betting on such an outcome this time around. Price declines in the new homes market continue expand breadth, falling MoM in 49 of the 70 cities monitored in Nov vs. 33 in Oct.
  • China: Is imposing 2yr anti-dumping and anti-subsidy duties on General Motors, Chrysler Group, Mercedes-Benz U.S. International, BMW Manufacturing LLC, Honda of America Mfg., and American Honda Motor Co. vehicles with engines over 2.5 liters ranging from 2%-12.9% with the U.S. manufacturers facing the more punitive rates. This is on top of China’s current 25% tariff on imported cars.
  • China: Social unrest appears to be creeping back into the focus of the mainstream media as the government authorized a militant crackdown of Wuhan protests which had erupted after a local villager/protest organizer died in police custody.
  • Hong Kong: No longer just a selling price story, Hong Kong’s bubbly property market is starting to see cracks developing in the rental market as well, with prices falling -1% MoM in Nov – the first decline since Mar ’09 per Centaline Property Agency Ltd.
  • Japan: In support of Japan’s “key industry” (per Finance Minister Jan Azumi) the Diet extended tax breaks for fuel efficient vehicles through 2015 from the originally scheduled expiration date in April ’12. To help offset the lost tax revenue, lawmakers are going to impose a cap on tax deductions for taxpayers earning over ¥15 million yen ($192k) per year in addition to a new carbon tax proposal.  A further “comprehensive” tax overhaul is currently being debated as the nation seeks to begin reigning in its debt and deficits amid Europe’s sovereign debt crisis.
  • India: India’s legislative body passed the Food Security Bill, a new program that subsidizes grains for India’s poor (64% of the 1.2 billion population, as defined by the gov’t). The program is projected to expand current grain subsidy expenditures from 630 billion rupees annually to 950 billion. Obvious cons include: a) it’s a deficit-negative event; b) it doesn’t address the root causes of inflation (third-world infrastructure and a nationwide shortage of food storage/refrigeration facilities); and c) it showcases that populism is the only avenue whereby legislation can be enacted in India. On the flip side, it does take some heat off the wildly ineffective government, as it demonstrates that they can agree upon some new and meaningful initiative, having not done so since late last year amid staunch gridlock stemming corruption scandals and the government’s [mis]handling of the woeful inflation situation.
  • Korean Peninsula: With Kim Jong Il’s sudden death, the threat of geopolitical instability looms large over the region. Several regional scholars question Kim Jon Un’s (his son and official replacement) ability to maintain the “cohesion” (if you could call it that) that his father maintained throughout the communist party. Uncertainty weighed heavily on the KOSPI index today (down -3.4%); defense contractors broadly closed limit up, however, highlighting the tense nature of the transition and the potential for heightened military activity in the coming months and years. The two countries remain technically at war since the early 1950’s.
  • Australia: We flagged back in early May the contrarian indicator that was record issuance in Australia’s kangaroo bond market, as issuance tends to peak ahead of cyclical downturns in the global economy. We are starting to see that confirmed more forcefully in the data, as kangaroo bond sales in the fourth quarter to-date have fallen -88% QoQ to A$675 million.

Darius Dale

Senior Analyst

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