Emerging Markets Cheat Sheet (April 25, 2011)

Emerging Markets Cheat Sheet (April 25, 2011)

Strengths

• China has announced this week that it raised the minimum income tax threshold to Rmb 3000/month from Rmb 2002/month. This change is expected to help boost consumer spending. It will also help increase purchasing power in the wake of rising food prices.
• According to news website Hexun.com, Zhou Wangjun, a deputy director of NDRC’s pricing department, has said China’s average wages will grow 15 percent annually in the five years through 2015. Wage increases will help China to become a consumption country.
• The China State Council met on Wednesday to discuss fine points of reforms in relation to interest rate liberalization and a natural resources tax. Also in the meeting, China’s premier Wen Jiabao announced an additional $2.8 billion will be invested to improve shantytowns as part of a social housing program.
• China telecom carriers have increased their capital expenditures for 2011. Total capital expenditure budgets are Rmb 132.4 billion, 74.8 billion and 50 billion for China Mobile, China Unicom and China Telecom, respectively. We expect telecom, 3G and 4G equipment providers and installation service companies to greatly grow their revenue and profits again this year.
• Both Korea and Japan financial authorities stood up to support U.S. Treasuries after S&P placed a negative outlook on the U.S. debt rating.
• Argentina’s industrial production grew by 8.5 percent during March.
• The Polish zloty had its strongest gain in two months after the Polish government said it would use some 14 billion euros it expects to receive from the European Union this year to buy the currency in order to reduce the need for higher interest rates.

Weaknesses

• Over the week, the People’s Bank of China (PBOC) has raised the bank’s required reserve rate (RRR) another 50 basis points. The RRR is now 20.5 percent for large banks in China. The RRR is not expected to impact the banks on the liquidity they need for lending since the hike is basically used to withhold the proceeds of matured PBOC notes in April. However, authorities in the PBOC have said China still has room to raise RRR further. The Asian stock markets have shrugged off the news.
• The Korean National Assembly has passed a bill to levy a capital tax on foreign currency liabilities on banks’ balance sheets at a rate of 0.2 percent.
• Shares of America Movil (AMX) have been under pressure following the telecom regulator’s ruling that the company had engaged in monopolistic practices and imposing a $1 billion fine on the company. Market participants expect AMX to challenge this ruling in courts and the issue may not be resolved for years to come.
• Real labor productivity in Eastern Europe still lags that of workers in Western Europe by a significant margin, according to a report from the World Bank.

Opportunities

• Xia Bin, a monetary advisor to the PBOC, has recently suggested that RMB could be revalued to its fair value by one move. Directionally, RMB has been appreciating faster recently.
• An appreciating RMB is a facilitator to Chinese outbound tourism. See the chart below showing increasing outbound spending by Chinese tourists. In 2010, Chinese tourists spent $55 billion overseas. This could rise to $190 billion by 2015. We have seen tourism-related companies perform well. Macau’s March visitor arrivals from China have increased 18 percent. We expect hotels and entertainment in Macau and Hong Kong to capture a large share of the booming outbound China tourism.

• Cuba has introduced a series of economic reforms that include elimination of various state subsidies and allowing citizens to buy and sell real estate. We believe it is likely that the country will gradually gravitate towards the Chinese economic model that will see the growth of private enterprises with a guiding hand of the state.
• The World Bank has predicted that Polish GDP will grow by 4 percent this year and by 4.2 percent next year, making it one of Europe's growth engines. Romania is expected to lead the pack in 2012 with 4.4 percent growth. Slovakia is also expected to see strong growth at 4.3 percent in 2012. “The performance of Slovakia and Poland is set to remain solid thanks to low pre-crisis imbalances, deep integration into European production networks, EU funds, and, in the case of Poland, solid consumption,” according to the World Bank.

Threats

• Rumor has it that some hedge funds have gathered in Hong Kong ready to short China’s real estate bubble and inflationary asset price in general, expecting that China’s flying economy will experience a hard landing. However, China’s central bank governor Zhou Xiaochun, while giving a speech at Qinghua University this week, said that short plans cannot be implemented simply because China’s capital market has a firewall to insulate speculation.
• Market participants will nervously await the first opinion poll on April 24 in the presidential race in Peru between Keiko Fujimori and Ollanta Humala.
• Armenia's nuclear power plant is operating the first generation Soviet reactors (built without containment vessels) well past their retirement age and lies on some of the world’s most earthquake prone terrain, according to National Geographic. The combination of design and location make the facility a danger to the entire region.