Macro

In this briefing:

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

1. 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). 

2. 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. 

3. 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.

4. 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.

5. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

In this briefing:

1. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness
2. Hong Kong’s Growth Mirage
3. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute
4. UK Politics: Showdown Postponed Again
5. Flash During Trade Talks

1. 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. 

2. 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.

3. 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.

4. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

5. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

In this briefing:

1. Hong Kong’s Growth Mirage
2. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute
3. UK Politics: Showdown Postponed Again
4. Flash During Trade Talks
5. China’s Coal Conundrum

1. 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.

2. 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.

3. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

4. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

5. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

In this briefing:

1. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute
2. UK Politics: Showdown Postponed Again
3. Flash During Trade Talks
4. China’s Coal Conundrum
5. Asia’s External Balances Signal Safety for Investors

1. 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.

2. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

3. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

4. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

5. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

In this briefing:

1. UK Politics: Showdown Postponed Again
2. Flash During Trade Talks
3. China’s Coal Conundrum
4. Asia’s External Balances Signal Safety for Investors
5. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

1. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

2. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

3. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

4. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

5. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

China News That Matters

• Nearing an agreement?
• Can´t live with ´em, can´t live without ´em.
• Just a trillion greenbacks up since January.
• Prudence please, no “flood-style” irrigation. 
• Wear flowers in your hair.

In this briefing:

1. Flash During Trade Talks
2. China’s Coal Conundrum
3. Asia’s External Balances Signal Safety for Investors
4. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area
5. UK Trip – Wake up to Deflation Risk

1. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

2. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

3. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

4. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

China News That Matters

• Nearing an agreement?
• Can´t live with ´em, can´t live without ´em.
• Just a trillion greenbacks up since January.
• Prudence please, no “flood-style” irrigation. 
• Wear flowers in your hair.

5. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

In this briefing:

1. China’s Coal Conundrum
2. Asia’s External Balances Signal Safety for Investors
3. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area
4. UK Trip – Wake up to Deflation Risk
5. Philippines: Institutional Reforms that Promote Macro Stability

1. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

2. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

3. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

China News That Matters

• Nearing an agreement?
• Can´t live with ´em, can´t live without ´em.
• Just a trillion greenbacks up since January.
• Prudence please, no “flood-style” irrigation. 
• Wear flowers in your hair.

4. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

5. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.

In this briefing:

1. Asia’s External Balances Signal Safety for Investors
2. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area
3. UK Trip – Wake up to Deflation Risk
4. Philippines: Institutional Reforms that Promote Macro Stability
5. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

1. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

2. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

China News That Matters

• Nearing an agreement?
• Can´t live with ´em, can´t live without ´em.
• Just a trillion greenbacks up since January.
• Prudence please, no “flood-style” irrigation. 
• Wear flowers in your hair.

3. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

4. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.

5. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

Prabowo again squandered a chance in a debate to gain ground, as Widodo appeared more confident and in command.  Prabowo’s incessant efforts to sow fear of foreigners does little to weaken his opponent.  Widodo’s lead was intact as of late January, despite claims from two pollsters (Indomatrik, Median) who are demonstrably unreliable or even fraudulent.  Lippo Group owner James Riady suffered repudiation: after having testified in court that he met the Bekasi District chief by coincidence and did not discuss his Meikarta project with her, KPK prosecutors played a phone recording that shows otherwise.  BI has held rates steady, citing the current account deficit after a gaping January trade deficit.  The government continues its efforts to sack more than 2,000 civil servants who are corruption convicts.  Repsol discovered gas in South Sumatra. 

Politics: The second of five debates in the presidential election marked another missed opportunity for Gerindra Chair Prabowo Subianto to gain ground on President Joko Widodo.  Instead, the incumbent again landed blows that hurt the retired general, highlighting his unfamiliarity with e-commerce jargon and drawing attention to his land assets measuring 340,000 ha.  For his part, Prabowo pointedly projected a conciliatory demeanor, perhaps to dispel perceptions that he is temperamental, but it squandered a chance to assail the incumbent and thereby persuade voters to opt for change.  Prabowo adhered to form by advocating protectionism and expansion of state involvement in the economy.  He used nearly every answer to disparage foreigners, which is an error: sowing suspicion of foreigners does little to weaken his opponent (Page 2) (Transcript translated by Ref Wkly, p. 8).  Hard‑line Islamic groups convened again in Jakarta (p. 3). 

Surveys: In the July 2014 election, the Center for Strategic Development and Policy Studies (Puskaptis) performed a Quick Count survey of ballot‑station results that declared Prabowo the winner, and the Association of Polling Firms (Persepsi) ousted Puskaptis from its ranks.  But the head, Hasan Yazid, has re‑emerged as the founder of Indomatrik, another purported polling firm.  Yazid claims to have findings showing Prabowo’s support on par with Widodo’s.  Along with supposed findings from another obscure agency, Median, this is injecting confusion into perceptions of the presidential election.  In fact, two reputable agencies determined in late January that Widodo’s lead was intact (p. 4).   

Justice: In the Meikarta‑Lippo bribery scandal, prosecutors dispute the testimony provided in court last month by group owner James Riady (p. 5).  Information Minister Rudiantara faced questioning from the Election Oversight Agency (Bawaslu) for having jested, in an event with ministry personnel, about preferences for presidential tickets (p. 7).

Policy News: Cabinet members are preparing measures that will finally force regional officials to sack civil servants convicted of corruption (p. 7). 

Energy: Spain’s Repsol announced the largest gas discovery in 18 years – a reservoir in Musi Banyuasin, South Sumatra measuring two trillion cubic feet (p. 8).

Economics: Bank Indonesia (BI) kept its benchmark rate unchanged at 6.0% (p. 9).

Appendix: The presidential candidates debated the topics of infrastructure, the environment and natural resources on 17 February (transcript and analysis, p. 9).

In this briefing:

1. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area
2. UK Trip – Wake up to Deflation Risk
3. Philippines: Institutional Reforms that Promote Macro Stability
4. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text
5. US Dollar Demand – Fading Appetite

1. Trade Talks/Huawei/ Stock Surprise/Monetary Policy /Greater Bay Area

China News That Matters

• Nearing an agreement?
• Can´t live with ´em, can´t live without ´em.
• Just a trillion greenbacks up since January.
• Prudence please, no “flood-style” irrigation. 
• Wear flowers in your hair.

2. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

3. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.

4. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

Prabowo again squandered a chance in a debate to gain ground, as Widodo appeared more confident and in command.  Prabowo’s incessant efforts to sow fear of foreigners does little to weaken his opponent.  Widodo’s lead was intact as of late January, despite claims from two pollsters (Indomatrik, Median) who are demonstrably unreliable or even fraudulent.  Lippo Group owner James Riady suffered repudiation: after having testified in court that he met the Bekasi District chief by coincidence and did not discuss his Meikarta project with her, KPK prosecutors played a phone recording that shows otherwise.  BI has held rates steady, citing the current account deficit after a gaping January trade deficit.  The government continues its efforts to sack more than 2,000 civil servants who are corruption convicts.  Repsol discovered gas in South Sumatra. 

Politics: The second of five debates in the presidential election marked another missed opportunity for Gerindra Chair Prabowo Subianto to gain ground on President Joko Widodo.  Instead, the incumbent again landed blows that hurt the retired general, highlighting his unfamiliarity with e-commerce jargon and drawing attention to his land assets measuring 340,000 ha.  For his part, Prabowo pointedly projected a conciliatory demeanor, perhaps to dispel perceptions that he is temperamental, but it squandered a chance to assail the incumbent and thereby persuade voters to opt for change.  Prabowo adhered to form by advocating protectionism and expansion of state involvement in the economy.  He used nearly every answer to disparage foreigners, which is an error: sowing suspicion of foreigners does little to weaken his opponent (Page 2) (Transcript translated by Ref Wkly, p. 8).  Hard‑line Islamic groups convened again in Jakarta (p. 3). 

Surveys: In the July 2014 election, the Center for Strategic Development and Policy Studies (Puskaptis) performed a Quick Count survey of ballot‑station results that declared Prabowo the winner, and the Association of Polling Firms (Persepsi) ousted Puskaptis from its ranks.  But the head, Hasan Yazid, has re‑emerged as the founder of Indomatrik, another purported polling firm.  Yazid claims to have findings showing Prabowo’s support on par with Widodo’s.  Along with supposed findings from another obscure agency, Median, this is injecting confusion into perceptions of the presidential election.  In fact, two reputable agencies determined in late January that Widodo’s lead was intact (p. 4).   

Justice: In the Meikarta‑Lippo bribery scandal, prosecutors dispute the testimony provided in court last month by group owner James Riady (p. 5).  Information Minister Rudiantara faced questioning from the Election Oversight Agency (Bawaslu) for having jested, in an event with ministry personnel, about preferences for presidential tickets (p. 7).

Policy News: Cabinet members are preparing measures that will finally force regional officials to sack civil servants convicted of corruption (p. 7). 

Energy: Spain’s Repsol announced the largest gas discovery in 18 years – a reservoir in Musi Banyuasin, South Sumatra measuring two trillion cubic feet (p. 8).

Economics: Bank Indonesia (BI) kept its benchmark rate unchanged at 6.0% (p. 9).

Appendix: The presidential candidates debated the topics of infrastructure, the environment and natural resources on 17 February (transcript and analysis, p. 9).

5. US Dollar Demand – Fading Appetite

In 2011 the world experienced the best year of demand expansion – in US dollar terms – in any year since the financial crisis, until 2018 that is. But you would hardly realise that that was the case by reading the newswires, the stories there since early 2018 have been about ‘synchronised slowdown’ and, in particular, the demand downdraft from China. The reality is that developed countries (the US, EU, UK and Japan) plus developing Asia (China, India and the Asean-4) produced US$4.1trn of ‘new’ GDP demand in 2011 and in 2018 was on course to produce US$4.1trn in new dollar demand.

In this briefing:

1. UK Trip – Wake up to Deflation Risk
2. Philippines: Institutional Reforms that Promote Macro Stability
3. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text
4. US Dollar Demand – Fading Appetite
5. The Internet: Hacks, Clicks, and Money

1. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

2. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.

3. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

Prabowo again squandered a chance in a debate to gain ground, as Widodo appeared more confident and in command.  Prabowo’s incessant efforts to sow fear of foreigners does little to weaken his opponent.  Widodo’s lead was intact as of late January, despite claims from two pollsters (Indomatrik, Median) who are demonstrably unreliable or even fraudulent.  Lippo Group owner James Riady suffered repudiation: after having testified in court that he met the Bekasi District chief by coincidence and did not discuss his Meikarta project with her, KPK prosecutors played a phone recording that shows otherwise.  BI has held rates steady, citing the current account deficit after a gaping January trade deficit.  The government continues its efforts to sack more than 2,000 civil servants who are corruption convicts.  Repsol discovered gas in South Sumatra. 

Politics: The second of five debates in the presidential election marked another missed opportunity for Gerindra Chair Prabowo Subianto to gain ground on President Joko Widodo.  Instead, the incumbent again landed blows that hurt the retired general, highlighting his unfamiliarity with e-commerce jargon and drawing attention to his land assets measuring 340,000 ha.  For his part, Prabowo pointedly projected a conciliatory demeanor, perhaps to dispel perceptions that he is temperamental, but it squandered a chance to assail the incumbent and thereby persuade voters to opt for change.  Prabowo adhered to form by advocating protectionism and expansion of state involvement in the economy.  He used nearly every answer to disparage foreigners, which is an error: sowing suspicion of foreigners does little to weaken his opponent (Page 2) (Transcript translated by Ref Wkly, p. 8).  Hard‑line Islamic groups convened again in Jakarta (p. 3). 

Surveys: In the July 2014 election, the Center for Strategic Development and Policy Studies (Puskaptis) performed a Quick Count survey of ballot‑station results that declared Prabowo the winner, and the Association of Polling Firms (Persepsi) ousted Puskaptis from its ranks.  But the head, Hasan Yazid, has re‑emerged as the founder of Indomatrik, another purported polling firm.  Yazid claims to have findings showing Prabowo’s support on par with Widodo’s.  Along with supposed findings from another obscure agency, Median, this is injecting confusion into perceptions of the presidential election.  In fact, two reputable agencies determined in late January that Widodo’s lead was intact (p. 4).   

Justice: In the Meikarta‑Lippo bribery scandal, prosecutors dispute the testimony provided in court last month by group owner James Riady (p. 5).  Information Minister Rudiantara faced questioning from the Election Oversight Agency (Bawaslu) for having jested, in an event with ministry personnel, about preferences for presidential tickets (p. 7).

Policy News: Cabinet members are preparing measures that will finally force regional officials to sack civil servants convicted of corruption (p. 7). 

Energy: Spain’s Repsol announced the largest gas discovery in 18 years – a reservoir in Musi Banyuasin, South Sumatra measuring two trillion cubic feet (p. 8).

Economics: Bank Indonesia (BI) kept its benchmark rate unchanged at 6.0% (p. 9).

Appendix: The presidential candidates debated the topics of infrastructure, the environment and natural resources on 17 February (transcript and analysis, p. 9).

4. US Dollar Demand – Fading Appetite

In 2011 the world experienced the best year of demand expansion – in US dollar terms – in any year since the financial crisis, until 2018 that is. But you would hardly realise that that was the case by reading the newswires, the stories there since early 2018 have been about ‘synchronised slowdown’ and, in particular, the demand downdraft from China. The reality is that developed countries (the US, EU, UK and Japan) plus developing Asia (China, India and the Asean-4) produced US$4.1trn of ‘new’ GDP demand in 2011 and in 2018 was on course to produce US$4.1trn in new dollar demand.

5. The Internet: Hacks, Clicks, and Money

There is this thing called the internet that can be pretty cool sometimes. In all seriousness though, the internet is a driving force for making money and spending money. Last week we took a long look at mobile phones and continuing a deep dive on technology today we take look at the internet in China. This will not be a total encyclopedia but a snap shot of some key features.