23 November 2018
Asia week ahead: Increasing headwinds to growth

Manufacturing releases crowd the Asian economic calendar, but India’s 3Q18 GDP and the central bank of Korea's monetary policy meeting are the main highlights of next week

Asia: Some sense of 4Q18 GDP growth

China’s manufacturing PMI for November coupled with hard manufacturing data from Japan, Korea, Singapore, and Thailand for October will give a sense of where GDP growth of these countries is headed in the final quarter of the year.

We don’t see China's manufacturing PMI drifting far off the threshold level of 50; where it has hovered around since September. Even though export growth has held up since the onset of the trade war, export orders have been contracting at an increasing pace. This has dragged industrial production growth below 6% in the last two months, supporting our view of GDP growth slipping below 6.5% in the final quarter.

Electronics matter more for the rest of the Asia reporting manufacturing data and judging by the ongoing sell-off in electronic stocks; things don’t appear to be looking great. Electronic exports from Korea are still growing on an annual basis, but those from Japan, Singapore, and Thailand have either been flat or contracting. Not only electronics, but weak automobile demand has been an added drag on manufacturing in Japan and Thailand.

As such, GDP growth across Asia is poised for a sustained slowdown in the fourth quarter.

ASEAN morning bytes

General market tone: Wait and see. 

Traders will move cautiously on Friday with scant developments overnight. Investors will continue to monitor developments on the trade front ahead of the G-20 meeting at the end of the month.

International theme: Risk sentiment remains fragmented with energy prices lower anew

  • Hopes for a Brexit deal and headway into the Italian budget deliberations boosted sentiment ever so slightly but investors remain skittish with important meetings coming up. US markets were closed but rising energy stockpile pushed oil lower with investors looking to possible supply cuts at the 6 December meeting.  
China: Intervening in the yuan, for what?

The People's Bank of China spent CNY 91.58 billion on foreign-exchange sales in October. We believe this means the central bank wants USD/CNY to cross the 7.0 mark, but without any market hiccups

China's central bank spends second largest amount on forex sales in 2018

In October, the Chinese central bank spent CNY 91.58 billion on forex sales, which is the second largest amount in 2018. However, this was less than September, which was CNY 119.39 billion.

This data has always been eye-catching, especially during the yuan's depreciation, because it implies the central bank might have spent money in the market to stop or slow down the depreciation by selling dollars. And we don't completely rule out this possibility. 

Given the speed of the monthly yuan depreciation in October, which was 1.56%, up from 0.55% in September, we believe the central bank might have sold dollars to intervene as the speed of the depreciation indicates more intervention.

Will the central bank intervene again in the coming months?

We don't think anyone can answer this question, not even the central bank.

  • It seems the central bank is allowing the yuan to be more responsive to news, data and ad hoc information, which means the yuan is more flexible. This should imply the central bank doesn't intervene frequently.
  • But the central bank could be intervening with a target. This is more interesting because the market then wants to know what the 'target' is. Is USD/CNY at 7.0 a target or is there a line below that?

We think the central bank could be targeting small ranges that would lead USD/CNY to cross 7.0. For example, 6.91- 6.95 might be a target range for a certain period, then a weaker yuan range of 6.95 - 7.00 for later, so that eventually, USD/CNY crosses 7.0 without surprising the market. 

Therefore, we don't agree that the People's Bank of China won't allow USD/CNY to cross the 7.0 handle.

We believe USD/CNY will depreciate when trade war tension escalates, and crossing 7.0 looks increasingly likely.

The central bank is more likely to be managing market sentiment by making sure the exchange rate doesn't surprise the market. The scale of interventions will become smaller as the exchange rate approaches 7.0 so that foreign exchange reserves only fall mildly.

For now, we maintain our forecast at 7.0 by the end of this year. 

Correction: 22nd November 2018

An earlier version of this article misstated the value of the foreign-exchange sales as $91.58 billion instead of CNY 91.58 billion. This version corrects the inadvertent error.  

Reading time around 4 minutes

Good MornING Asia - 23 November 2018

A slow day ahead with scant economic data and market holidays in some Asian countries 

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