22 June 2018
Asia week ahead: Spotlight on Indonesia’s central bank

Expect Indonesia's central bank to hike rates by another 25bp to stem the rupiah's weakness. The other highlights include manufacturing releases for May from Korea, Singapore, Taiwan and Thailand

Bank Indonesia to tighten policy ... again

Bank Indonesia’s monetary policy meeting is the key highlight of the week ahead. 

Financial stability will be the main focus of the meeting as an escalation of global trade tensions keep domestic financial assets and the rupiah (IDR) under a weakening pressure. Following its Philippine counterpart, BI moved to tighten policy in May and raised interest rates by a total 50bp, two 25bp moves taking the main policy rate to 4.75%. Alas, the hikes did little to stem the currency weakness in both countries. Philippine's central bank raised rates by another 25bp this week, and we expect Bank Indonesia to follow suit next week.

On a positive note, however, Indonesia’s trade data for May due next week is likely to show a swing in the trade balance to surplus from a deficit. A swing to about $1bn surplus in May from $1.6bn deficit in the previous month is what we anticipate, should bring some life into the currency.

China retaliation coming

A state-run newspaper in China has published an editorial saying the country could retaliate against US stocks if the trade war escalates

Retaliation directly on US companies

Even China couldn't match the US's threat of imposing as much as $450 billion worth of tariffs on Chinese imports, as the US only exports about $130 billion to China. In recent days, China said it could retaliate "qualitatively". Now, we're clear what "qualitative" means; China could target US stocks.

The official newspaper's editorial emphasised that China could hurt US companies listed on the Dow Jones industrial average if the trade war were to escalate. The editorial wrote, "The 30 companies that make up the Dow Jones average may be some of the first to bear the brunt of China's countermeasures". 

How to "hurt US stocks"?

We belive that China may impose administrative hurdles on US companies operating in China, which would then have an impact on stock prices. The practice could be similar to the administrative measures on South Korea's Lotte Department Stores in China, which involve an examination of goods before they can be shelved.

We don't expect China to short stocks in financial markets because affecting business operations of US companies operating in China is more controllable by the Chinese government than doing this through the stock market.

Would this end the trade war?

No, we don't expect this would end the trade dispute. Quite the reverse, we expect some tough talk between the US and China to follow, though this could be effective in delaying the process of a trade war.

For the time being, US companies could lobby the US government intensively and extensively to avoid a further rise in trade tensions. As the editorial mentioned, the risk of a fall in the Dow Jones goes up with these measures, potentially hurting retirement funds and therefore prompting more lobbying on the US government.

China's other weapon

China's other weapon could be to sell US Treasuries. This isn't a remote possibility if the US administration insists on imposing more tariffs on China.

Impact on markets, production and trade, globallly

Given that the supply chains of US companies are likely to be sourced globally, the impact is not limited to the stock market. If China were to affect business operations of US companies operating in China, we would expect production, sales, and trade to be affected globally, not just in China and the US. Investment decisions by these US companies and their supply chains will also be disturbed. World economic growth will slow, not just China and US.

China policies to cushion potential trade war impact

China has started pre-emptive measures to buffer the negative impacts of rising trade and investment tensions between China and the US

China adopts measures to soften the impact of a potential trade war

China will not passively sit back if a trade war is unleashed. Indeed, it is already implementing policies to temper any effect  We look at some of the more important ones below.

Reading time around 4 minutes

Good MornING Asia - 22 June 2018

It's super quiet in terms of the data calendar today, with a motley bunch of second/third tier releases in the Asia-Pacific region. Watch out for some further commentary on trade, as the US' Wilbur Ross has been quite critical about Chinese claims of openness

In this bundle