Growth Concerns In The Asian Markets

While recovery seems well underway in the Chinese economy, the government is also looking at addressing the structural issues in the country. Overall, the Asian markets continue to underperform the US and Euro zone markets, though the pressures on the latter are providing respite for and welcome fund inflows into the emerging economies.

China’s Growth Story Remains Intact

Confidence in a gradual recovery in China persisted after the economy grew 7.8 per cent in Q3, in line with expectations. Market optimism is also fanned by growing capital inflows, as indicated by the increasing foreign reserves and the resulting CNY appreciation, which is up 2.45 per cent YTD, despite continued weakness in exports. Headline exports were down 0.3 per cent YoY in September 2013, as exports to the ASEAN market slowed markedly and those to the EU dipped into the red.

While weak exports tell the story of a feeble global demand, other data hints at a gradual recovery in domestic consumption. Electricity consumption rose 10.4 per cent YoY in September, while industrial production met the expectations of 9.6 per cent growth. Retail sales in the first nine months increased by 12.9 per cent, while fixed asset investment has sustained an above 20 per cent growth rate.

As has been stressed upon by Chinese officials, the long-term attractiveness of the country will stem from addressing the inherent structural issues instead of double-digit economic expansion. Such issues typically include an ageing population, overcapacity in key industries, rising property prices, pileup of local government debt and financial repression in the banking industry.

The State Council has already taken steps this month to eradicate overcapacity in the major industries. The issue of an ageing population is now being addressed by the gradual relaxation of the one-child policy in selected cities, while financial repression is being tackled by the ongoing interest rate liberalisation. Furthermore, local government debt is being audited by the central government, and subsequent action steps include the possibility of introducing municipal bonds in order to make the states financially self-sufficient.

As far as housing prices are concerned, we have not seen any sweeping measures put in place in recent months which could indicate that the rising prices are a genuine reflection of a shortage in housing. Only time will tell. But for now, the belief in the China story remains.

Financial Markets Summary

Malaysia’s Bold Fiscal Budget; GST Implementation

Fiscal prudence and long-term sustainability were high on the Malaysian government’s agenda as it announced the fiscal budget for FY2014. The fiscal deficit target for next year was lowered to 3.5 per cent from an expected four per cent this year, with the GDP also expected to accelerate in 2014. The government reiterated its intention to keep the total debt below 55 per cent of the country’s GDP.

What caught everyone’s eye, though, was the much anticipated GST, which will come into effect on April 1, 2015. The GST rate is set at six per cent, higher than what most predicted, but basic food items and essential services will be exempted. GST will replace the existing five to 10 per cent Sales Tax and the six per cent Service Tax. The sugar subsidy has also been removed with immediate effect, after fuel subsidies were cut earlier.

Along with the introduction of GST, the personal and corporate income tax rates will be lowered. The personal income tax rate will drop by one-three per cent and the chargeable income level will also be adjusted. Corporate Income Tax will fall by one per cent to touch 24 per cent. The budget seems to have struck the right chord by identifying the key challenges of fiscal deficit and federal debt.

Thailand Lowers 2013 GDP Forecast to 3.7 Per Cent

Bank of Thailand has moved to lower its forecast for the country’s GDP growth this year to 3.7 per cent from 4.2 per cent, the fourth time it has done so. This is in light of stagnant private consumption, weak exports and lesser stimulus from the public sector. In the Monetary Policy Committee’s meeting, the GDP forecast for 2014 was also slashed from five per cent to 4.8 per cent, with the possibility of a further delay in public infrastructure spending.

Meanwhile, capacity utilisation has been on a downward spiral. The customs data for September showed a seven per cent decline in exports, way below the expectation of 0.5 per cent growth. Imports were down 5.2 per cent compared to the estimates of 3.6 per cent. Given the recent macro statistics coming out of Thailand and the high base effect from 2012, it is almost certain that the GDP growth would trend lower this year.

Elsewhere, Finance Minister Kittiratt Na-Ranong said that he can accept higher-than-desirable interest rates provided that the currency remains near current levels, with the USDTHB trading close to 31.

Markets

The Asian markets continue to underperform those in the US and Europe. Global investors are convinced of US economic strength now, and are allocating capital there. Increasingly, data from Europe has led investors to believe that European recovery, while in its infancy, has legs, and capital flows are also moving towards Europe.

Weak payroll data and pressure on the US economy from the government shutdown has resulted in the Fed tapering expectations now being pushed further down to end March 2014, providing respite to emerging markets. While fixed income and currencies in Asia have recovered well, equity recovery is still a bit shaky. A large part of this equity weakness in the region stems from uncertainties over Chinese growth expectations. Any weakness in Chinese economic data could bring about some correction in Asian equities.