Emerging Markets Radar (July 9, 2012)
Strengths
- China cut interest rates again this Thursday, effective Friday, July 6. The one-year benchmark lending rate was cut by 31 basis points to 6 percent, and the one-year benchmark deposit rate was cut by 25 basis points to 3 percent. In the meantime, the People’s Bank of China (PBOC) lowered the floor of lending rates to 70 percent of the benchmark rates from 80 percent, which was just lowered from 90 percent in the previous rate cut. It’s another asymmetric cut, but much less asymmetric than the previous cut.
- According to China International Capital Corporation, of the 16 cities it monitors, housing sales volume increased last week by 33 percent week-over-week, and 15 percent month-over-month. Year-to-date, average sales volume has risen 18 percent. Also in the housing market, Shanghai existing home sales surged 20 percent in June to a 17-month high of 19,300 units, Shanghai Daily reported, citing Century 21.
- Brazil’s inflation rate in June fell to the lowest level in nearly two years by rising 0.08 percent from a month earlier.
Weaknesses
- Macau’s gambling revenue for June rose 12.2 percent to 23.3 billion patacas, versus market expectations of 15.3 percent.
- January to May profits at large and medium-sized Chinese iron and steel companies fell 94 percent year-over-year to Rmb 2.53 billion, the economic Information Daily reports.
- The Guangzhou government unveiled a purchase limit on some mid- and small-sized passenger vehicles license plates from July 1, with a yearly quota of 120,000 units or 10,000 units a month.
- Turkey, the fastest-growing economy after China and Argentina, saw its GDP shrink 0.4 percent (up 3.2 percent year-over-year) in the first quarter from the previous three months, promoting the market to believe an interest rate cut by its central bank.
Opportunities
- With further rate cuts, mortgage rates are lowered again. Particularly, PBOC has encouraged banks to lend to first-time home buyers. The best mortgage rate is a 30 percent discount to the benchmark rate. The chart below shows a downtrend in the ratio between monthly mortgage payments to income, showing improvement in housing affordability.
Threats
- Even with another rate cut within a month by China’s central bank, the market is still muted in Hong Kong and China. The best explanation might be the lack of liquidity in the banking system due to the lower Loan to Deposit (LTD) ratio, currently at 75 percent, and high bank requirement reserve ratio (RRR), currently at 20 percent. The market consensus is for China to cut RRR or reduce LTD soon. Also adverse to the economy is the weak loan demand this year, which might be improved by starting infrastructure projects and increasing consumption spending assisted by fiscal policy.
