Conclusion: As China draws closer to the end of a multi-year, structural deceleration in growth rates, credit conditions, which are a lagging indicator, are sending both bullish and bearish signals. Elsewhere within the region, growth continues to slow at a slower rate and inflation continues to trend down generally.
Positions in Asia: Long Chinese equities (CAF); Long Hong Kong equities (EWH); Short Indian equities (INP).
All % moves week-over-week unless otherwise specified.
- EQUITIES Median: +1.8%; High: Vietnam +5.2%; Low: New Zealand -0.8%; Callout: Philippines and Indonesia up +13.4% and +10.4%, respectively over the LTM vs. regional median of -14.3%
- FX (vs. USD) Median: +0.2%; High: Indian rupee +2.3%; Low: Thai baht -0.4%; Callout: Indian rupee +3.1% YTD vs. regional median of +0.3%
- S/T SOVEREIGN DEBT (2yr yields) High: Philippines +7.9%/+21bps; Low: Hong Kong -18.4%/-8bps; Callout: Australia -25.5%/-114bps over the last six months
- L/T SOVEREIGN DEBT (10yr yields) High: Singapore +3.2%/+5bps; Low: Japan -3.5%/-3bps
- SOVEREIGN YIELD CURVE High: Hong Kong/Singapore +5bps; Low: Philippines -32bps
- 5YR CDS Median: +0.3% High: Australia +4.2%/+3bps; Low: Japan -4.7%/-7bps; Callout: Japan +24.9%/+29bps over the last three months vs. regional median of -3.3%
- 1YR O/S INTEREST RATE SWAPS Median: +0.7%; High: Indonesia +4.5%/+25bps; Low: Singapore -23.6%/-13bps; Callout: China -12.5%/-44bps over the last three months vs. regional median of -0.8%
- O/N INTERBANK RATES Median: flat; High: China +16%/+64bps; Low: Hong Kong -33.6%/-5bps; Callout: China +57.1%/+169bps over the past month vs. a regional median of +0.0%
- CORRELATION RISK Asian currencies continue to trade on inflation expectations, with the JPM Asia Dollar Index correlating +72% with the CRB Index on an immediate-term TRADE duration and +93% on a six-month basis. We are dovish on the slope of inflation throughout the region over the intermediate-term TREND and, thus, remain generally negative on Asian currencies vs. the USD as a result.
Full performance tables can be found at the conclusion of this note.
CHARTS OF THE WEEK
Chinese FX reserves are indicating a slight degree of capital outflow as dovish policy speculation is clouding the outlook for yuan appreciation.
Chinese inflation data still does not auger well for dovish policy at the current juncture, however:
Growth Slowing’s Bottom:
- China: DEC economic data came in better than bad: New Loans accelerated to CNY640.5B MoM vs. CNY562.2B prior; M2 Money Supply growth accelerated to +13.6% YoY vs. +12.7% prior; Export growth slowed marginally to +13.4% YoY vs. +13.8% prior; Trade Balance growth accelerated to +$3.4B YoY vs. -$8.4B prior.
- China: While the high-frequency growth data appears to be basing, economic concerns continue to weigh on Chinese credit markets. The corporate A/AAA spread widened to a record high of 517bps earlier this week, per Chinabond.
- Japan: The DEC Economy Watchers Survey was better than bad. The “Outlook” Index ticked down slightly to 44.4 from 44.7 prior. The “Current” Index actually accelerated to 47 from 45 prior.
- Taiwan: Export growth slowed in DEC to +0.6% YoY vs. +1.3% prior.
- Indonesia: The Danareska Consumer Confidence Index ticked up in DEC to 91.6 vs. 91.4.
Deflating the Inflation II:
- China: CPI and PPI slowed in DEC to +4.1% YoY (vs. +4.2% prior) and +1.7% (vs. +2.7% prior), respectively. The former series is at a 15-month low, but still 10bps above target.
- South Korea: PPI slowed in DEC to +4.3% YoY vs. +5.1% prior. Import Prices also slowed in DEC to +7.1% YoY vs. +11.8% prior.
- China: The combination of an outlook for dovish policy, slower international trade, and USD appreciation (vs. EUR, GBP, etc.) has China’s FX reserves continuing to decline, falling -$20B to $3.18T in DEC. The implications of this slight degree of capital outflow – which Premier Jiabao is working to prevent – is that China requires less Treasury purchases to limit yuan appreciation.
- India: Indian corporations have a record $11.4B in dollar-denominated debt due in 2012. The large sum has weighed on the INR/USD exchange rate (-13.6% over the last six months) and dollar-denominated debt yields, which are a mere -6bps off the highs established during the thralls of OCT (vs. -97bps for Chinese corporations).
- India: The sovereign has $64.3B in rupee-dominated notes due in 2012 (vs. only $15.3B in 2013) – a sum that will likely necessitate another year of heavy issuance and may force the central bank (RBI) to continue with its QE program beyond current expectations in order to sustain liquidity in the banking system; that outcome is incrementally bearish for the rupee. On the flip side, rate cut speculation is spurring record international inflows into India’s fixed income markets (+$3.9B in DEC). Even domestic investors are spurning gold in favor of fixed income mutual funds; assets managed by fixed income funds increased +17% MoM in DEC vs. -4.3% for gold funds. Our models don’t point to much room for the RBI to ease meaningfully in the near term, but if the RBI satisfied market expectations, we would eventually expect to see incremental downside for the rupee.
- Indonesia: Bank Indonesia held its benchmark interest rate at 6%, citing weakness in the rupiah as a threat to their inflation outlook (IDR/USD -3.5% over the last three months). One-year interest rate swaps widened +25bps wk/wk and are now only pricing in a -25bps cut over the NTM.
- Philippines: Central bank governor Amando Tatangco said that he anticipates easing monetary poicy this quarter – particularly if conditions in Europe deteriorate: “Given benign inflation conditions and a favorable inflation outlook, we have room to support domestic activity should the global economy deteriorate significantly.” Two-year sovereign debt yields actually jumped +21bps wk/wk, suggesting to us that the market had been pricing in some degree of easing irrespective of Europe.
- South Korea: The Bank of Korea held its benchmark interest rate flat at 3.25%, actually threatening to hike if “price gains become chronic”. Both our models (accelerating growth and inflation in 1H12) and Korea’s interest rate swaps (1yr tenor 20bps > than benchmark rate) market view this as a very credible threat.
- China: The China Securities Regulatory Commission stated that it will encourage long-term investors (namely insurers and pension funds) to invest in the nation’s equities. Per Chairman Gou Shuqing, “China should make investments using the 2 trillion yuan in provincial pension funds assets and 2.1 trillion in household pension fund assets.” The free-float market cap of the Shanghai Composite Index is on 4.4 trillion yuan, so any success in convincing these entities to participate in equity investing (they currently do not to any meaningful degree) could be rather bullish for Chinese stocks.
- China: The China Banking Regulatory Commission has banned banks from transferring commercial bill assets to trusts – a common practice used to circumvent capital requirements and extend more credit. The move had a profound effect on interbank liquidity in China, with overnight Shibor increasing +116bps day/day! This move will weigh on Chinese credit growth on the margin.
- China/Japan: Chinese officials sent Treasury Secretary Tim Geithner to Japan empty handed, as he failed to convince the Chinese to cut back on Iranian crude oil imports. Japan did, however, agree to take steps to reduce Iranian imports. Iran is a key supplier of crude to both countries.
- Japan: Bank of Japan Governor had some fairly hawkish commentary earlier in the week: “There are limits to what monetary policy can achieve and governments must implement necessary reforms to aid the global economy. Providing liquidity as a lender of last resort is, in essence, a policy to buy time. It is essential that the necessary structural reforms take place while time is being bought, as the time that we can buy becomes progressively more expensive.” While being careful not to read too much into these words (i.e. no rate hike anytime soon), they do suggest to us that the central bank of Japan, which has been the poster child for failed Keynesian policy, is nearing the end of the rope in this regard. Shirakawa’s explicit call for Japanese fiscal policymakers to back away from their own brand of Keynesianism is a noteworthy change on the margin.
- India: The ability of Indian companies to return capital to shareholders will be severely challenged in 2012, as they face a record $5.3B in convertible bonds due this year. Average corporate dollar-denominated debt yields are just -6bps off the high of 6.99% reached in OCT, suggesting it will be costly to refinance. The SENSEX’s -15.8% LTM drop heightens equity dilution risk as well, should corporations ultimately turn to conversion.
- Taiwan: Tomorrow, Taiwan will host its presidential election. The market is pricing in a victory for progressive, pro-Chinese relations incumbent Ma Ying-jeou of the Koumintang Party, as the EWT put/call ratio has risen to 3.4x – just off four-year highs last reached two months prior to his first term. He is challenged by the Democratic Progressive Party’s Tsai Ing-wen and the Koumintang Party’s James Soong. Ing-wen is opposed to closer ties with the mainland and Chinese officials have stated publically that relations would suffer if Tsai wins.