Brief Macro: China’s Coal Conundrum and more

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.