Macro

In this briefing:

1. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
2. Futures and Spot Opportunities
3. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook
4. Taiwan Investors Factor In China Recovery
5. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

1. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

2. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

3. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

4. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

5. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• 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.

In this briefing:

1. Non-Performing Loans in China
2. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
3. Monetary & Supply Side Takeaways From U.S. GDP
4. FLASH: UK IP Buffeted by Energy Volatility in 1Q19
5. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

1. Non-Performing Loans in 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.

2. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

3. Monetary & Supply Side Takeaways From U.S. GDP

• 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.

4. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

• The UK’s manufacturing PMI slipped to 52.0, as expected, which is much better than the Euro area. Official manufacturing data remain weaker, though.
• A cold snap in January turned to unseasonable warmth in February, thereby raising volatility in energy utility output. Gas extraction looks likely to lean against this effect within IP, but the net effect has knocked my forecasts around nonetheless.

5. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

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).

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). 

In this briefing:

1. Futures and Spot Opportunities
2. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook
3. Taiwan Investors Factor In China Recovery
4. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
5. China – Eurozone Negative Feedback Loop.

1. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

2. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

3. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

4. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• 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.

5. China – Eurozone Negative Feedback Loop.

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. 

In this briefing:

1. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook
2. Taiwan Investors Factor In China Recovery
3. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
4. China – Eurozone Negative Feedback Loop.
5. Non-Performing Loans in China

1. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

2. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

3. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• 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.

4. China – Eurozone Negative Feedback Loop.

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. 

5. Non-Performing Loans in 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 this briefing:

1. Taiwan Investors Factor In China Recovery
2. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
3. China – Eurozone Negative Feedback Loop.
4. Non-Performing Loans in China
5. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

1. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

2. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• 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.

3. China – Eurozone Negative Feedback Loop.

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. 

4. Non-Performing Loans in 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.

5. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

In this briefing:

1. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
2. China – Eurozone Negative Feedback Loop.
3. Non-Performing Loans in China
4. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
5. Monetary & Supply Side Takeaways From U.S. GDP

1. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• 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.

2. China – Eurozone Negative Feedback Loop.

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. 

3. Non-Performing Loans in 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.

4. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

5. Monetary & Supply Side Takeaways From U.S. GDP

• 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.

In this briefing:

1. China – Eurozone Negative Feedback Loop.
2. Non-Performing Loans in China
3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
4. Monetary & Supply Side Takeaways From U.S. GDP
5. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

1. China – Eurozone Negative Feedback Loop.

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. 

2. Non-Performing Loans in 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.

3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

4. Monetary & Supply Side Takeaways From U.S. GDP

• 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.

5. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

• The UK’s manufacturing PMI slipped to 52.0, as expected, which is much better than the Euro area. Official manufacturing data remain weaker, though.
• A cold snap in January turned to unseasonable warmth in February, thereby raising volatility in energy utility output. Gas extraction looks likely to lean against this effect within IP, but the net effect has knocked my forecasts around nonetheless.

In this briefing:

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
2. Monetary & Supply Side Takeaways From U.S. GDP
3. FLASH: UK IP Buffeted by Energy Volatility in 1Q19
4. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near
5. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

2. Monetary & Supply Side Takeaways From U.S. GDP

• 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.

3. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

• The UK’s manufacturing PMI slipped to 52.0, as expected, which is much better than the Euro area. Official manufacturing data remain weaker, though.
• A cold snap in January turned to unseasonable warmth in February, thereby raising volatility in energy utility output. Gas extraction looks likely to lean against this effect within IP, but the net effect has knocked my forecasts around nonetheless.

4. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

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).

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). 

5. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

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. 

In this briefing:

1. Monetary & Supply Side Takeaways From U.S. GDP
2. FLASH: UK IP Buffeted by Energy Volatility in 1Q19
3. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near
4. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness
5. Hong Kong’s Growth Mirage

1. Monetary & Supply Side Takeaways From U.S. GDP

• 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.

2. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

• The UK’s manufacturing PMI slipped to 52.0, as expected, which is much better than the Euro area. Official manufacturing data remain weaker, though.
• A cold snap in January turned to unseasonable warmth in February, thereby raising volatility in energy utility output. Gas extraction looks likely to lean against this effect within IP, but the net effect has knocked my forecasts around nonetheless.

3. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

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).

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). 

4. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

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. 

5. Hong Kong’s Growth Mirage

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.

In this briefing:

1. FLASH: UK IP Buffeted by Energy Volatility in 1Q19
2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near
3. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness
4. Hong Kong’s Growth Mirage
5. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute

1. FLASH: UK IP Buffeted by Energy Volatility in 1Q19

• The UK’s manufacturing PMI slipped to 52.0, as expected, which is much better than the Euro area. Official manufacturing data remain weaker, though.
• A cold snap in January turned to unseasonable warmth in February, thereby raising volatility in energy utility output. Gas extraction looks likely to lean against this effect within IP, but the net effect has knocked my forecasts around nonetheless.

2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

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).

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). 

3. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

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. 

4. Hong Kong’s Growth Mirage

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.

5. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute

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.