20 August 2018
China: Central bank closing outflow loopholes for further monetary easing

The People's Bank of China is actively closing possible capital outflow loopholes and this firewall building will allow it to lower interest rates and weaken the yuan, which makes it very likely that we'll see USDCNY passing 7.0 in 2018

Interest rate stabilises from further downward pressure, for now at least

The People's Bank of China would like to lower the interest rate to cushion against potential adverse impacts from the escalating trade war and unwind some harsh damages (e.g. bonds defaults) caused by financial deleveraging reforms in 1H18. However, when the 1D interbank pledged repo and overnight SHIBOR fell below 2% - which is the level of the US's Fed funds rate upper bound - it triggered capital outflow concerns from the inverted China-US interest rate spread. 

This could be the reason the central bank has guided the interbank interest rates higher than the 2% level after a sharp fall in the first week of August. The central bank also guided the interest rate on 3M government deposit auction stable at 3.7% in August, the same as July after a sharp fall from 4.73% in June. 

As we expect another rate hike from the Federal Reserve in September, China's interest rate could be lower than the US again by then. PBoC will have to live with this negative spread because the economy needs lower interest rates to support investments and economic growth in this ongoing trade spat.

Malaysia: A huge downside GDP miss in the second quarter

We have cut our 2018 growth forecast to 4.5% from 5.2%. Slowing growth and low inflation reinforce our view that the central bank (BNM) will keep monetary policy on hold over the remainder of the year. Things are slowly turning sour for the Malaysian ringgit, keeping USD/MYR on track to meet our 4.35 forecast for end-2018

Net exports dent GDP growth in 2Q18

Malaysia’s GDP growth slowed sharply to 4.5% year-on-year in the second quarter from 5.4% in the first. We expected 5.2%, only a modest decline and in line with consensus. 

Looking at the breakdown, weak net exports were the main source of downside GDP surprise, contributing only 0.1 percentage point (ppt) to GDP growth as against 4ppt contribution in the previous quarter (see figure). As such, domestic demand returned to the driving seat, led by a 4.3ppt private consumption contribution, up from 3.7ppt in 1Q, while government consumption and fixed capital formation also contributed more than in the previous quarter. This left inventory as a net drag on GDP growth of 0.9ppt. 

On the industry side, strong exports supported manufacturing growth, but services remained the main force behind GDP growth. Finance Minister Lim Guan Eng sees 2018 GDP growth at about 5%. The central bank (BNM) cut its forecast today to 5.0% from 5.5-6.0%.

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Good MornING Asia - 20 August 2018

This week, the US starts the public hearing into raising tariffs of 25%, not the originally suggested 10% on $200bn of Chinese imports - US businesses will protest

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