Emerging Markets Radar (December 5, 2011)

Emerging Markets Radar (December 5, 2011)

Strengths

• The People’s Bank of China (PBOC) cut the bank required reserve rate (RRR) by 50 basis points, effective December 5. PBOC’s decision was announced just a day before the release of China’s official PMI number for November that sank into contraction. Goldman Sachs, among few in the market, believes this is a signal that points to the beginning of the cycle for an easing monetary cycle in China.
• Thailand central bank cut its benchmark interest rate by 25 basis points to 3.25 percent, citing that the industrial growth was affected by the flood more than expected. The country is expected to stimulate its economy with fiscal policy as well.
• S&P upgraded Bank of China and China Construction Bank from BBB+ to A-, and kept single A for Industrial and Commercial Bank of China, while it downgraded J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley. The reason for the upgrading of the Chinese banks is the Asian governments’ greater willingness to prop up their financial systems coupled with higher savings rates, according to S&P.
• Korea’s current account surplus widened to $4.23 billion in October, reaching a one-year high.
• Macau Gross Gaming Revenue (GGR) for November surpassed 23 billion, up 32 percent year-over-year, easily beating market expectation.
• Indonesia’s CPI rose 4.15 percent year-over-year in November, slowing for a third successive month.
• In November, Russian crude oil output was up by 0.9 percent year-over-year at 10.34 million barrels per day (same as in October), and gas production up 8.9 percent year-over-year.
• The seasonally-adjusted HSBC Russia Manufacturing PMI headline index rebounded from 50.4 in October to 52.6 in November. This was the strongest improvement in the manufacturing business sentiment since March and stands in contrast with weak PMI reports from the eurozone and China.

• Turkey PMI remained in expansion territory, easing to 52.3 in November from 53.3 in October. In response to further gains in new orders, Turkish businesses hired additional workers in November and the rate of job creation picked up to a seven-month high.

Weaknesses

• China’s November official PMI fell 1.4 percent from October and sank into contraction territory at 49 percent, after hovering between 50 to 52 percent in the last 6 months. A PMI reading below 50 indicates the industrial activities are contracting. Most importantly, weakened export and domestic orders pushed the new orders index to fall 2.7 percent to 47.8 percent, slipping into contraction territory for the first time since January 2009, and the production index was down 1.4 percent to 50.9 percent. If the production index falls below 50, it might indicate widespread unemployment. This is probably the reason that some in the market are expecting China to ease its monetary policy from here once inflation is tamed.
• HSBC final China PMI was also down to 47.7 versus 51 for October.
• Industrial enterprises’ profits grew 25.3 percent year-to-date in October on a year-over-year basis, down 1.7 percent from the year-to-date number in September, as growth has slowed for a fifth consecutive month. This suggests the moderation of aggregate demand has dampened sales and squeezed manufacturers’ profit margins.
• Korea’s industrial production rose 6.2 percent year-over-year in October, advancing at the slowest pace since August this year.
• Philippines’ budget deficit widened in October to $489 million as revenue growth eased and government spending rebounded. Philippine third-quarter GDP increased 3.2 percent, up from the prior quarter but below expectation.
• October housing transactions in China declined 25 percent from September and prices fell in 33 of 70 cities, Bloomberg News reported, citing Chinese government’s data. This is another area that the market is watching closely since the housing market is important to the overall economy in China.
• Indonesia’s exports rose 16.7 percent year-over-year in October, missing expectation and much smaller than September’s 46.3 percent gain. Imports rose 29.1 percent.
• Thailand’s CPI rose 4.19 percent year-over-year in November, holding above 4 percent for an eighth month as the flooding caused food prices to rise.
• Business conditions continued to deteriorate in the eurozone, with German November PMI dropping for the seventh consecutive month to 47.9, from 49.1 in October. Czech and Polish economies are linked to Germany’s, and PMIs in both countries followed suit, slipping into contraction territory for the first time since 2009.

Opportunities: China Monetary Policy Cycle

• This week’s bank required reserve rate (RRR) cut of 50 basis points by the PBOC might be just the beginning of China’s monetary policy moving from tightening to easing. Historically, as the chart shows below, Hong Kong and Shanghai stock markets began to rise when the PBOC eased and the stock market began to decline when the PBOC tightened money supply.
• While the U.S. Federal Reserve had been quick to turn on the money printing press when equity markets dropped in 2008, the European Central Bank (ECB) has been slow to respond to the eurozone periphery crisis. But with the likely sources of funding not being sufficient to cover the size of the European bailout fund, the ECB may have no choice but to print money as well.

Threats

• China’s November PMI indicates its economic activities are contracting. Given that PMI is a forward looking indicator, the economy could be in a downside momentum for several months as housing transactions are slowing, and export and domestic orders are shrinking. Some analysts are worried that the Chinese government may not be taking preemptive policy action to stop the down trend as, historically, they have been reactionary instead.
• Bond issuance by European banks has plunged this year. These markets have frozen up since July and European banks had to turn to borrowing through short-term interbank markets. While coordinated action by the central banks this week will ease pressure for short-term funding, European banks are facing long term-refinancing needs in 2012 (see the chart below from the Economist).