The pace of UK activity growth implied by the services PMI picked up amid a surprise rebound to 51.3. It remains gloomy relative to the official data, consistent with the survey’s bias to exaggerate uncertainty’s depressing effect.
A slight slowing in comparable sectors is still likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.3% q-o-q, albeit close to rounding down.
Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit, this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China.
We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo. This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook. Polls show PDI-P and Gerindra gaining at the expense of Islamic parties. The 4th debate on 30 March could help Prabowo draw slightly closer. The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen. Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia. A reasonable MRT tariff is in place.
Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day. He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2). The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2). Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4). Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5).
Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact. A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided. Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate. Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6).
Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10).
Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).
Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.
Delivered electronically every Friday, Reformasi Weekly is written by Kevin O’Rourke, author of the book Reformasi.
Reformasi Weekly is a product of PT Reformasi Info Sastra.
Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).
Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks. But his opponent is brazen and risks therefore exist. Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact. Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14).
The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.
But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
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Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit, this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China.
We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit, this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China.
We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
The U.S. GDP report released earlier this week contains some interesting information on U.S. growth and inflation trends and risks for 2019.
First, the economic growth strengthened in the fourth quarter as year-over-year real GDP growth firmed to 3.1%, which made 2018 the strongest year for growth since 2005.
Second, our core measure of demand (C+I) also grew at 3.1%, which means swing factors played little role in this growth performance (indeed the average contribution from inventory investment of 0.4% points was mostly offset by a widening of the trade gap that subtracted 0.3% points from growth).
Third, this strong growth performance accompanied by only a 0.3% point drop in the unemployment rate in 2018 suggests that potential growth in 2018 firmed to around 2½%. The source of this faster potential growth has been rising labor force participation rather than faster productivity growth, which raises questions to its sustainability since aging of the population is likely to keep downward pressure on participation.
Fourth, nominal GDP growth of 5.3%, which is the fastest since 2005, suggests that monetary policy has reflated this important indicator to a pace that was viewed as desirable when trend real growth was at 3% since this would accommodate a 2% inflation rate. However, if nominal GDP growth remains above 5% but real GDP growth slows towards trend (of 2½% or lower if the pick up in labor force participation stalls out), we would see inflation rising above the Fed’s target.
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Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo. This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook. Polls show PDI-P and Gerindra gaining at the expense of Islamic parties. The 4th debate on 30 March could help Prabowo draw slightly closer. The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen. Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia. A reasonable MRT tariff is in place.
Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day. He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2). The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2). Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4). Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5).
Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact. A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided. Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate. Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6).
Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10).
Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).
Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.
Delivered electronically every Friday, Reformasi Weekly is written by Kevin O’Rourke, author of the book Reformasi.
Reformasi Weekly is a product of PT Reformasi Info Sastra.
Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).
Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks. But his opponent is brazen and risks therefore exist. Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact. Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14).
The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.
But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
While the Fed and Treasury stabilized and strengthened the financial system following the financial crisis we think recent decisions by the Fed are increasing the risk of future instability. The Fed’s efforts to manage market volatility are potentially counterproductive and there are risks to addressing liquidity via abundant reserves concentrated at a few large banks. Researchers within the Federal Reserve systems have raised concerns but policymakers appear to be discounting these warnings.
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Sparring remains lively in the presidential campaign, with the Prabowo camp targeting a liability for Widodo: retired generals in the cabinet. But Prabowo is still campaigning ineffectively and defections of allied governors shows that some in his camp consider his prospects dim. Police controversially dropped charges against a chief hard-line Islamic figure. Anti-foreign rhetoric, chiefly from Prabowo, threatens to tug policy discourse towards his vision of barriers, autarky and state control. Two forthcoming regulations on the property sector aim to safeguard consumers. A review of geothermal policies is possible. Upstream energy investment may be improving. The IA-Cepa may conclude on 4 March. Adhi Karya’s Jabodebek LRT faces a thorny land problem in Bekasi, where the China-backed fast train project may have complicated matters by overpaying.
Politics: Campaign sparring continues apace, as Gerindra Chair Prabowo Subianto criticized infrastructure projects (they enable imports to penetrate further) and reiterated that “Rp11,000 trillion in Indonesian assets reside abroad”. Campaign officials for President Joko Widodo lambasted the remarks and recalled that both Prabowo and his running mate appeared in the ‘Panama Papers’. Meanwhile, retired generals from the rival campaigns exchanged jabs about events of May 1998; for Prabowo, the topic contains pitfalls (Page 2). In a rare example of violence in election campaigning, a fracas outside a rally in Yogyakarta caused three minor injuries among rival youth groups (p. 4). Elite endorsements matter little, but Widodo has garnered overwhelming support from regional heads (p. 4). Police controversially dropped charges on hard‑line Islamic leader Slamet Ma’arif (p. 5). Agus Harimurti Yudhoyono (AHY) takes over Partai Demokrat’s campaigning as Susilo Bambang Yudhoyono attends to his ill spouse (p. 6).
Surveys: A newly released poll from the Cyrus Network shows Widodo’s lead intact – but the actual data is from mid‑January, a period that other polls already covered (p. 6).
Policy News: Coordinating Maritime Affairs Minister Lt Gen (ret) Luhut Panjaitan urged greater state investment in geothermal power (p. 7). Protecting consumers from misleading practices by property developers will reportedly be the focus of two forthcoming regulations (p. 8). The IA-Cepa is reportedly due for signing on 4 March (p. 9).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: The Jakarta Mass Rapid Transit (MRT) will ramp up operations during a trial from 12-24 March, with commercial operations expected by end‑March (p. 9). Press reports hint that the China‑financed Bandung fast train project may have overpaid for land in Bekasi, thereby complicating acquisition of nearby land needed for the Jakarta-Area Light Rail Train (LRT) project, which faces delay until April 2021 (p. 9).
Economics: The trade minister touted FTAs (p. 11). Upstream Regulatory Agency (SKK Migas) officials expressed optimism about investment flows into oil and gas (p. 12).
Outlook: Although the winner is not yet clear, the loser thus far in the presidential election appears to be the international community. Pronounced anti‑foreign rhetoric from the Prabowo camp threatens to cow policymakers and jeopardize prudent economic management. Excessive skepticism of international engagement would come at an awkward time: the current account deficit requires capital inflows, while protectionism would augur lower growth (p. 12).
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China has won the trade war so far, with China’s exports to the US rising 11.3% YoY in 2018, while its imports from the US rose just 0.7% YoY. For the latest two months (Dec18-Jan19), China’s exports to the US declined 3% YoY, but its imports from the US declined a precipitous 38.5% YoY. (The logic is obvious: less than half of China’s exports to the US carry tariffs, while over 80% of US exports to China must pay large import tariffs). Luckily for China, US President Trump has still allowed the March 1st deadline to be extended. That, combined with a weak US$ (and a far more dovish US Federal Reserve than 3 months ago) have taken pressure off the stressed Chinese economy. That any US-China trade deal will result in a stronger RMB takes further pressure off China, which otherwise saw net capital and services/income outflows of US$105bn in Nov18-Jan19 even amid the weakening of the US$ (numbers that would have been worse if the US$ had stayed strong, inducing larger capital outflows).
The stress is most evident in domestic demand, with China’s imports down 4.5% YoY in the latest two months. China’s car sales declined 6% YoY in 2018, the first yearly decline since 1990, with car sales down 16.7% YoY in 4Q 2018 and down 19% YoY in December, with Chinese car brands’ sales declining 22% YoY in January 2019 (while total passenger car sales fell 17.7% YoY). This was a climactic reversal, as China’s car output had grown 20-fold between 1995 and 2017. The PBOC has responded with 350bp of cuts in banks’ RRR (to 13.5% by , from 17% a year ago), in a move to boost the money-multiplier (but with a modest impact on M2 and loan growth).
China’s total social financing (TSF) rose by a record RMB4.64tn in January 2019, betraying signs that policy makers were panicking, hence turning on the shadow lending taps anew. Although TSF rose less in 2018 than in either 2016 or 2017, it rose more in 2H 2018 than in 2H 2017, responding to the monetary easing in 2H 2018. Despite a year of persistent and aggressive monetary easing, China’s M2 had grown a modest 8.1% YoY in 2018, up only marginally from 8% YoY at the end of October and November 2018; in January 2019, M2 accelerated to 8.4% YoY growth in response to the latest RRR cuts. FAI (fixed asset investment) slumped to just 2.5% YoY growth in May and July 2018, but then rebounded in the rest of 2018 (growing 5.9% YoY for the whole year). Opening the spigot of shadow lending involves the last throw of the dice: Premier Li Keqiang is among leading critics of this policy approach. For now, both the possibility of a trade deal and the weakness of the US$ are near-term positives that will buoy China. But the only remaining factor consistently buoying China’s growth is exports: so China will perforce need to make significant concessions in the final trade negotiations. If it does not, the positive scenario will rapidly deteriorate, and China’s high-wire act will collapse. We are cautiously bullish on China in the near-term (3-month horizon), but remain negative on a longer-term (9 months and longer) view.
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China has won the trade war so far, with China’s exports to the US rising 11.3% YoY in 2018, while its imports from the US rose just 0.7% YoY. For the latest two months (Dec18-Jan19), China’s exports to the US declined 3% YoY, but its imports from the US declined a precipitous 38.5% YoY. (The logic is obvious: less than half of China’s exports to the US carry tariffs, while over 80% of US exports to China must pay large import tariffs). Luckily for China, US President Trump has still allowed the March 1st deadline to be extended. That, combined with a weak US$ (and a far more dovish US Federal Reserve than 3 months ago) have taken pressure off the stressed Chinese economy. That any US-China trade deal will result in a stronger RMB takes further pressure off China, which otherwise saw net capital and services/income outflows of US$105bn in Nov18-Jan19 even amid the weakening of the US$ (numbers that would have been worse if the US$ had stayed strong, inducing larger capital outflows).
The stress is most evident in domestic demand, with China’s imports down 4.5% YoY in the latest two months. China’s car sales declined 6% YoY in 2018, the first yearly decline since 1990, with car sales down 16.7% YoY in 4Q 2018 and down 19% YoY in December, with Chinese car brands’ sales declining 22% YoY in January 2019 (while total passenger car sales fell 17.7% YoY). This was a climactic reversal, as China’s car output had grown 20-fold between 1995 and 2017. The PBOC has responded with 350bp of cuts in banks’ RRR (to 13.5% by , from 17% a year ago), in a move to boost the money-multiplier (but with a modest impact on M2 and loan growth).
China’s total social financing (TSF) rose by a record RMB4.64tn in January 2019, betraying signs that policy makers were panicking, hence turning on the shadow lending taps anew. Although TSF rose less in 2018 than in either 2016 or 2017, it rose more in 2H 2018 than in 2H 2017, responding to the monetary easing in 2H 2018. Despite a year of persistent and aggressive monetary easing, China’s M2 had grown a modest 8.1% YoY in 2018, up only marginally from 8% YoY at the end of October and November 2018; in January 2019, M2 accelerated to 8.4% YoY growth in response to the latest RRR cuts. FAI (fixed asset investment) slumped to just 2.5% YoY growth in May and July 2018, but then rebounded in the rest of 2018 (growing 5.9% YoY for the whole year). Opening the spigot of shadow lending involves the last throw of the dice: Premier Li Keqiang is among leading critics of this policy approach. For now, both the possibility of a trade deal and the weakness of the US$ are near-term positives that will buoy China. But the only remaining factor consistently buoying China’s growth is exports: so China will perforce need to make significant concessions in the final trade negotiations. If it does not, the positive scenario will rapidly deteriorate, and China’s high-wire act will collapse. We are cautiously bullish on China in the near-term (3-month horizon), but remain negative on a longer-term (9 months and longer) view.
It may not feel like it. It may not smell like it. But make no mistake Hong Kong is in recession. We are underweight in our relative regional equity portfolio. The only positives are that the real cost of lending is easing (which might bring some relief to mortgage owners) and Hong Kong corporate balance sheets are in good shape to weather the current downturn. But the negative overwhelm these positives.
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Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo. This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook. Polls show PDI-P and Gerindra gaining at the expense of Islamic parties. The 4th debate on 30 March could help Prabowo draw slightly closer. The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen. Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia. A reasonable MRT tariff is in place.
Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day. He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2). The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2). Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4). Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5).
Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact. A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided. Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate. Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6).
Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10).
Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).
Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.
Delivered electronically every Friday, Reformasi Weekly is written by Kevin O’Rourke, author of the book Reformasi.
Reformasi Weekly is a product of PT Reformasi Info Sastra.
Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).
Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks. But his opponent is brazen and risks therefore exist. Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact. Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14).
The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.
But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
While the Fed and Treasury stabilized and strengthened the financial system following the financial crisis we think recent decisions by the Fed are increasing the risk of future instability. The Fed’s efforts to manage market volatility are potentially counterproductive and there are risks to addressing liquidity via abundant reserves concentrated at a few large banks. Researchers within the Federal Reserve systems have raised concerns but policymakers appear to be discounting these warnings.
The Federal Open Market Committee (FOMC) sought to further mitigate the fallout from last December’s rise in the federal funds rate by ignoring its own economic models, and, instead, embracing a more dovish outlook for the policy rate, as well as slowing the planned pace of its balance sheet roll off.
No further interest rate increases are envisaged by the FOMC in 2019, while any required in 2020 will not take policy settings into restrictive territory due to the imminent arrival of sustainable growth.
The persistently low inflation backdrop has permitted the Fed to embrace a dovish approach, but engineering a significant decline in real interest rates could prove problematic if the economy falters at some future point.
Fears about yield curve inversion and recession risks persist, despite the Fed’s dovish tilt, thereby potentially raising concerns about the overall credibility of monetary policy conduct.
US short-term interest rates are being anchored to a “new normal” environment of low inflation and slower economic growth compared to history, and, consequently, the bond market appears to have won its battle of wills with the FOMC by forcing members to reduce their estimate of the neutral federal funds rate.
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China has won the trade war so far, with China’s exports to the US rising 11.3% YoY in 2018, while its imports from the US rose just 0.7% YoY. For the latest two months (Dec18-Jan19), China’s exports to the US declined 3% YoY, but its imports from the US declined a precipitous 38.5% YoY. (The logic is obvious: less than half of China’s exports to the US carry tariffs, while over 80% of US exports to China must pay large import tariffs). Luckily for China, US President Trump has still allowed the March 1st deadline to be extended. That, combined with a weak US$ (and a far more dovish US Federal Reserve than 3 months ago) have taken pressure off the stressed Chinese economy. That any US-China trade deal will result in a stronger RMB takes further pressure off China, which otherwise saw net capital and services/income outflows of US$105bn in Nov18-Jan19 even amid the weakening of the US$ (numbers that would have been worse if the US$ had stayed strong, inducing larger capital outflows).
The stress is most evident in domestic demand, with China’s imports down 4.5% YoY in the latest two months. China’s car sales declined 6% YoY in 2018, the first yearly decline since 1990, with car sales down 16.7% YoY in 4Q 2018 and down 19% YoY in December, with Chinese car brands’ sales declining 22% YoY in January 2019 (while total passenger car sales fell 17.7% YoY). This was a climactic reversal, as China’s car output had grown 20-fold between 1995 and 2017. The PBOC has responded with 350bp of cuts in banks’ RRR (to 13.5% by , from 17% a year ago), in a move to boost the money-multiplier (but with a modest impact on M2 and loan growth).
China’s total social financing (TSF) rose by a record RMB4.64tn in January 2019, betraying signs that policy makers were panicking, hence turning on the shadow lending taps anew. Although TSF rose less in 2018 than in either 2016 or 2017, it rose more in 2H 2018 than in 2H 2017, responding to the monetary easing in 2H 2018. Despite a year of persistent and aggressive monetary easing, China’s M2 had grown a modest 8.1% YoY in 2018, up only marginally from 8% YoY at the end of October and November 2018; in January 2019, M2 accelerated to 8.4% YoY growth in response to the latest RRR cuts. FAI (fixed asset investment) slumped to just 2.5% YoY growth in May and July 2018, but then rebounded in the rest of 2018 (growing 5.9% YoY for the whole year). Opening the spigot of shadow lending involves the last throw of the dice: Premier Li Keqiang is among leading critics of this policy approach. For now, both the possibility of a trade deal and the weakness of the US$ are near-term positives that will buoy China. But the only remaining factor consistently buoying China’s growth is exports: so China will perforce need to make significant concessions in the final trade negotiations. If it does not, the positive scenario will rapidly deteriorate, and China’s high-wire act will collapse. We are cautiously bullish on China in the near-term (3-month horizon), but remain negative on a longer-term (9 months and longer) view.
It may not feel like it. It may not smell like it. But make no mistake Hong Kong is in recession. We are underweight in our relative regional equity portfolio. The only positives are that the real cost of lending is easing (which might bring some relief to mortgage owners) and Hong Kong corporate balance sheets are in good shape to weather the current downturn. But the negative overwhelm these positives.
Successful resolution of geopolitical issues pertaining to China’s continued integration into the world economy remains crucial for global corporate profit expectations and risky assets.
Uncertainty about the US economic outlook has increased in recent weeks as testified by falling corporate profit growth expectations, while the recent government shutdown has delayed the release of crucial data required for monetary policy formulation.
China’s economy continues to decelerate, as testified by slowing big ticket activity, but record monthly credit growth in January indicates how the fallout from the US trade dispute has diverted attention away from lowering excessive leverage in the economy, as well as rising bond defaults.
The US will insist that currency devaluation by China cannot be deployed under any Sino-US trade dispute resolution, but this will reduce China’s sovereignty over discretionary monetary policy conduct.
Meanwhile, rumours are circulating that the US wants to impose a Plaza Accord style memorandum for China to be committed to an orderly appreciation of the yuan as part of any trade dispute resolution, but China will be wary of the fate that befell Japan after 1985 following the Plaza agreement.
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