Emerging Markets Cheat Sheet (August 15, 2011)
Strengths
- China retail sales in July were up 17.2 percent year-over-year, and 1.26 percent month-over-month. Investors in Hong Kong and the Association of Southeast Asian Nations (ASEAN) stock markets have supported the stock price of consumer stables and luxury goods.
- China’s July industrial production was up 14 percent year-over-year, and 0.9 percent month-over-month, showing China is in a safe soft landing.
- China’s July exports were up 20.4 percent year-over-year, while imports were up 22.9 percent. July’s export numbers broke the monthly export record set in June. In spite of slowing growth in the U.S., Europe, and Japan, China export numbers show some hopeful signs that global trade is still resilient. From January to July, China’s total global trade surplus was $76.2 billion, but China runs a $29.5 billion trade deficit with Japan, and $12 billion with ASEAN countries.
- Korea’s central bank left its benchmark interest rate at 3.25 percent.
- China’s renminbi (RMB) rapidly appreciated during the week. The RMB, for the first time, closed at 6.3898 to the dollar. While a strong RMB is making Chinese consumers and corporations richer, it also helps other countries to sell more to China. Particularly in a world where there is a lack of growth, this will be able to help the U.S. and European countries with their economic recovery. A strong RMB is also positive for commodity producers, Chinese airlines, and Chinese tourism.
- China fixed asset investment grew 25.4 percent from January to July, showing robust activities.
- The Turkish Statistical Institute announced the industrial production indices for June 2011. The industrial production index increased 6.7 percent in June 2011, compared to the same month of 2010.
- Walmart, the world’s largest retailer, is said to be exploring a bid for Carrefour’s Brazil business to help bolster its scale in Latin America.
Weaknesses
- China’s July CPI was 6.5 percent, 0.01 percent higher than in June. Pork alone contributed 1.46 percent to the monthly number. Economists and analysts believe China’s inflation has peaked and expect CPI to come down slowly. This may not force the People’s Bank of China to further tighten the money supply by raising interest rates, but it won’t be enough to make the central bank ease the current policy. However, China’s National Development and Reform Commission (NRDC) said, after the inflation number was released, that China’s inflation is at an inflection point. It further said that China’s economy will be able to make a soft landing.
- China’s auto production and sales in July were up 1.26 percent and 2.18 percent year-over-year, respectively, but were down 6.69 percent and 11.19 percent month-over-month, respectively. Passenger car sales were one million units in the month, up 6.74 percent year-over-year, but down 8.78 percent from June.
- Hong Kong’s second quarter GDP grew 5.1 percent, less than the market estimate of 6 percent. Hong Kong residents are buying gold and houses to protect their wealth under the pressure of the dollar’s weakness.
The combined outflows from all emerging market funds was $7.8 billion, with total outflows of $14 billion year-to-date. Country-wise, Russia saw the largest redemptions over the last 60 days.
Opportunities
- China tax revenue is increasing as a percentage of GDP and in absolute amount. Normally, higher tax income may not be a good thing for the economy, but this time is different. This huge revenue can provide the Chinese government with the means to handle the economy in case the global economy retreats into recession.
- Poland’s inflation rate unexpectedly fell in July on lower food prices, adding to arguments for the central bank to hold off on tightening monetary policy for the rest of the year.
- Finance ministers from across South America are discussing the creation of a fund to provide the region a safety net and ward off the effects of the global financial crisis, Brazilian Finance Minister Guido Mantega said. Officials are meeting in Buenos Aires to discuss creating a new stability fund or strengthening an existing mechanism, known as the Fondo Latinoamericano de Reservas. The $4 billion FLAR pools foreign currency reserves from five Andean nations plus Costa Rica and Uruguay to help member nations that run into balance of payment problems.
Threats
- Chinese premier Wen JiaBao asked the Ministry of Railway to lower the speed across all the high speed trains. China is now suspending approval for new rail projects. In addition, rumor has it in China that the government will reduce 20 percent of the affordable housing units planned for 2012. These events will affect the demand for building materials, such as steel and cements, and will be a headwind on the sector in the short term.
- Due to the U.S. government debt fiasco and European sovereign debt crisis, the probability for the world to go into a recession has increased. The market, therefore, is reasoning that the global economic environment may make the Chinese central bank think twice before implementing another rate increase, or not increase the rate at all. Should the PBOC go ahead and increase interest rates this month, the market likely will become volatile.
- Ukraine is keen to revise its Russian gas contract, looking for another $100 per cubic meter discount to Russian gas prices, which would bring Ukraine down to levels paid by Belarus. The discount would cost the Russian gas monopoly Gazprom $4 billion by JP Morgan estimates.
- Colombia is “very worried” about the possibility that the U.S. Federal Reserve will start a third round of asset purchases, known as quantitative easing, to boost the economy, Finance Minister Juan Carlos Echeverry said. He is worried that should the Federal Reserve do so, “It could bring another phase of the currency war.”
