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Showing posts with label Interest rates. Show all posts
Showing posts with label Interest rates. Show all posts

Sunday, August 20, 2023

Recession unlikely for global economy but challenges linger on

 

THE global macroeconomic picture is still more sluggish than investors would have liked, particularly when viewed from the gross domestic product (GDP) growth perspective for the first half of 2023 (1H23), although it remains a stretch to say the world is heading for a recession.

A quick glance across the Causeway to Singapore sees the city-state registering a 0.5% yearon-year (y-o-y) growth rate for the second quarter of the year (2Q23), extending marginally from the 0.4% expansion it charted for the preceding quarter.

Elsewhere, such as in major markets like the United States, China and the eurozone, economists are of the opinion that growth has been sturdy during 1H23 but stiff hurdles still remain on the horizon.

While acknowledging that global GDP growth has been slower so far in 2023 due to several familiar factors such as higher interest rates and elevated cost pressures, newly appointed Bank Negara governor Datuk Abdul Rasheed Ghaffour is also not expecting the global economy to slip into recession.

He says resilient domestic demand in advanced economies is providing sufficient support, while also anticipating worldwide trade to improve towards the end of 2023.

Most notably, he perceives China’s slower-than-expected recovery to have limited impact on Malaysia’s own economic expansion and improvement.

“Malaysia’s economy is well diversified in terms of products, services and trade partners, which would cushion the Chinese impact,” says Abdul Rasheed.

According to Bernard Aw, chief economist at Singapore’s Coface Services South Asia-pacific Pte Ltd, although the global economy has been resilient year-to-date, growth outlook in the second half remains challenging, not the least from increasing signals of weakening Chinese economic activity.

Forecasting global GDP expansion to be at 2.2% y-o-y for 2023, and anticipating a similar growth rate of 2.3% growth for next year, he says: “We expect Asean GDP growth (2023: 4.3%; 2024: 4.6%) to be generally faster than advanced economies – at 4.3% and 4.6% for 2023 and 2024 respectively – as tourism recovery and domestic demand drives economic activity.”

Continuing subdued external demand for the region would imply that domestic demand has to continue to partially offset some of the slack, Aw, tells Starbizweek.

“However, the challenging economic environment worldwide, relatively high inflation and interest rates means that even growth in domestic consumption and investment may fall short of expectations,” Aw opines.

Commenting on the overall global interest rate environment, he believes that the trend of disinflation would continue into 2H23, mainly driven by lower energy prices, coupled with China’s deflation having fed into lower export prices, which has also moderated global price pressures.

On the flipside, Aw thinks underlying inflation will remain fairly sticky, despite not being severe enough necessarily for central banks to revert to hiking rates.

“Having said that, they will likely maintain the current restrictive interest rates for a longer-than-expected period,” he says.

Earlier in July, it was reported that the United States economy had grown 2.4% y-o-y in 2Q23, up from the 2% it posted for the first three months of the year and bringing 1H23 GDP to a commendable 2.2%.

“The improved expansion rate had been driven by consumer spending, on top of increases in non-residential fixed investment, government spending and inventory growth.

At the same time, China had registered a 6.3% 2Q23 y-o-y GDP growth rate, which was also an improvement from the 4.5% charted in the previous quarter.

The acceleration however was slower than the expected 7.3% forecast by economists on a Reuters poll, dragged back by tepid demand and sinking property prices which has sapped consumer confidence.

On the same note, chief executive of Centre for Market Education Carmelo Ferlito feels that China’s post “zero-covid” recovery has been fragile since the beginning.

“The economy is not an engine to be switched on and off, but rather it is a living emergent order.

“As such, China is paying the price to a degree with its severe, nation-wide lockdowns while it was implementing the zero-covid policy,” he says.

The decelerating growth in China, says Ferlito, is evidenced by the People’s Bank of China unexpectedly cutting a range of key interest rates on Tuesday, which is seen as an emergency move to reignite growth after new data showed the economy has decelerated further last month.

With Chinese officials from its National Bureau of Statistics also suspending reports on youth unemployment, he says the move would deprive investors, economists and businesses of another key data point on the declining health of the world’s second-largest economy.

Divulging more numbers, Ferlito says the twin moves of cutting rates and holding back unemployment data from the Chinese government has coincided with new data showing a slowdown in spending growth by consumers and businesses.

“Concurrently, factory output grew much less than expected, adding to a recent raft of worrying signals. For the first time since February, China’s headline measure of unemployment rose, climbing to 5.3%.

“The jobless rate for people ages 16 to 24, meanwhile, had marched steadily higher for six consecutive months to hit a series of record highs, culminating in a reading of 21.3% in June,” he says.

Ferlito says an economic trichotomy is emerging on the global scene, before adding: “The United States is still fighting inflation, but countries like Germany and Holland are starting to experience technical recession, while China is facing challenges of its own.

“It is that post-lockdown crisis that the CME predicted two years ago.”

Echoing Bank Negara governor Abdul Rasheed, he re-emphasises that it is important to look beyond GDP figures, making his case that if the GDP of a country declines because of a cut in impractical government spending, that would be positive for a country.

Conversely, he argues if GDP growth were to accelerate due to an increase in spending financed by debt, it ultimately would be a bane to the government’s coffers and the national economy.

Meanwhile, the International Monetary Fund (IMF) is predicting a 3% GDP global growth rate for this year and the next, receding from the 3.5% achieved in 2022.

It says the rise in central bank policy rates to stave off inflation has continued to weigh on economic activity, but the good news is that global headline inflation is expected to fall from 8.7% last year to 6.8% in 2023 and 5.2% in 2024.

“The recent resolution of the US debt ceiling stand-off and strong action by authorities to contain turbulence in the US and Swiss banking earlier this year reduced the immediate risks of financial sector turmoil. This moderated adverse risks to the outlook,” the IMF says.

However, it cautions that the balance of risks to global growth remains tilted to the downside, as inflation could remain high and even rise if further shocks occur, including those from an escalation of the Russia-ukraine conflict.

Moreover, the IMF warns that China’s recovery could slow further, partly due to unresolved real estate problems, with negative cross-border spillovers.

On the upside, inflation could fall faster than expected, reducing the need for tight monetary policy, and domestic demand could again prove more resilient

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Friday, August 4, 2023

Higher growth projected for 2023

Lee said interest rates may stay elevated for some time and expects Bank Negara to hold the OPR at the current level in 2023 and into 2024.

The commendable first-quarter showing augurs well, says the Socio-economic Research Centre

'STRUCTURAL REFORMS ARE KEY TO SUPPORTING THE ECONOMY AND RINGGIT' - Lee Heng Lee 

KUALA LUMPUR: The combination of declining exports, persistently high core inflation and cautious consumer spending will likely see the economy experiencing a moderation in growth in the second half of the year (2H23).

Despite anticipating a deceleration in economic growth in the upcoming quarters, Socio-economic Research Centre (SERC) has raised its 2023 gross domestic product (GDP) growth projection to 4.5% year-on-year (y-o-y) from 4.1% previously, to reflect the strength in the first-quarter (1Q23) economic growth.

The GDP expanded by 5.6% in 1Q23, exceeding the 4.8% growth achieved in 1Q22, thanks to sustained domestic demand underpinned by strong private expenditure and improvement in labour market conditions.

SERC executive director Lee Heng Guie said the robust consumer spending witnessed last year may not be replicated this year due to the high interest rate environment and more cautious consumer spending.

“The cash stimulus has already been spent and the spending boom, such as the ‘revenge spending’ that we saw post-pandemic, has already faded,” he said during SERC’S media briefing on the quarterly economic tracker for 2Q23.

Lee pointed out that the country’s exports had also started to ease as global demand weakens under the strain of high inflation and interest rates.

For 1H23, exports contracted by 4.5% y-o-y and Lee projects exports to decline by between 5% and 7% for the full year on the back of lower demand.

With these factors at play, SERC expects GDP to grow in a range of between 4% and 5% in 2H23, with consumer demand continuing to be the key growth driver in the remaining months of the year.

He added the elevated base effect in 2H22 will present another challenge to the 2H23 GDP performance.

On the overnight policy rate (OPR), Lee believes the current rate of 3% is at an “accommodative and supportive” level for sustainable economic activity.

He said interest rates may stay elevated for some time and expects Bank Negara to hold the OPR at the current level in 2023 and into 2024.

“Any change to the OPR is dependent on how resilient the economy is and how consumer inflation behaves.

“I think the current level is just right, (as) it will not significantly hurt the people.

“Structural reforms are key to supporting the economy and the ringgit.” Lee Heng Guie

“It is still supporting the economy, but does not overburden businesses and the people. Even though central banks are likely to end their rate hike cycles, it does not necessarily imply that they will reduce rates either,” he explained.

Lee expects most central banks to likely keep interest rates at current levels till inflation, both headline and core, subsides to a “comfortable range”.

In the majority of advanced economies, a comfortable range of inflation is around 2%, Lee observed. Although headline inflation has eased in Malaysia, Lee stressed the battle against inflation has not been won.

“This is because subsidy rationalisation is still on the table of the government. The government needs to address that following the state elections to control the budget deficit,” Lee noted.

Given the volatility in crude oil prices, Lee said the current oil subsidy scheme was fiscally unsustainable and would further contribute to deficits.

He added the ringgit had strengthened against the currencies of Japan, China, Australia, Taiwan and India since the US Federal Reserve’s (Fed) first federal fund rate hike in March last year.

However, against the greenback, the local unit is among a basket of currencies that have experienced a significant weakening after having declined by about 7.4% since the start of the rate hike cycle.

“Structural reforms are key to supporting the economy and the ringgit,” Lee stressed.

He said the proposed progressive wage model (PWM) plan, which is currently under consideration by the government, is a right step towards a productivity-linked wage system which will foster competitiveness by forging a stronger correlation between wages and productivity.

Lee, however, contends that a more comprehensive and practical analysis should be undertaken on the plan by a tripartite body, which includes representatives from the government, employers and employees.

This is due to the presence of valid concerns and areas of uncertainty within the proposal, such as whether the PWM would be extended to foreign workers and specific sectors.

In keeping the economy resilient, Lee emphasised on the importance of private investment.

He reiterated that private investment not only helped stimulate economic growth, but also generated jobs and thus benefiting both the community and the nation as a whole.

Speaking on the US economy, Lee believes that it is still resilient, citing the strength of its labour market and wage growth as indications. However, he said consumer spending remained robust and asserts inflationary pressure.

“In the United States, headline inflation has not reached the targeted 2% level, while core inflation remains sticky.

“This is something the Fed would be observing. If there is risk of inflation resurgence, it may still continue to increase rates,” Lee said.

Globally, Lee pointed out that the purchasing managers’ index for the manufacturing sector has continued its downtrend, sustaining below the 50-point threshold. The services sector, meanwhile, recorded a slight slowdown in its latest figures.

“We are worried the slowdown in the manufacturing sector has broadened and impacted the services sector,” Lee added.

On world trade volume and industrial production, Lee pointed out that both have been moderating, owing to slower demand. “This is why we saw a decline in exports for regional countries, including Malaysia, recently.”

The Star - StarBiz By KIRENNESH NAIR kirennesh@thestar.com.my 3 Aug 2023

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Wednesday, April 13, 2022

US forces other countries pay for its economic problems with monetary policy tightening: experts

If the US really acts wildly on China over the Ukraine issue, Chinese people will just face it

 China feels cascading effects with dropping stocks

With its stock market jumping, the dollar strengthening, and global capital flowing in, the US is again reaping profits but bringing financial shockwaves to foreign countries, whether they are what it claims are rivals, like China, or allies, like the EU, by tightening its monetary policy, experts observed.

As the Fed policy tightening accelerates, analysts said that the US is increasingly turning into a world "damager" instead of "protector" when the country finds its global responsibilities clash with its own national interests, and the world is paying the price for the US' domestic problems, like surging inflation.

In recent days, the side effects of US monetary policy, particularly the Fed's hawkish push for raising interest rates, have spread to multiple regions of the world and multiple financial areas.

The US Dollar Index is turning up sharply, at one point touching a ceiling of 100.19 on Friday, the highest level since May 2020. Accompanied by the rise is the weakening of global currencies including the yen, the euro and the yuan.

Global stock and bond markets are also sliding. The 10-year US Treasury yield topped its Chinese equivalent on Monday for the first time in 12 years.

The benchmark Shanghai Composite Index slipped by 2.61 percent on Monday, the Hong Kong-based Hang Seng Index dropped by more than 3 percent, and the Japanese Nikkei 225 was down 1.81 percent on Tuesday.

Contractions on global financial markets are generally considered to be a result of the Fed's move to increase interest rates recently, the first time in more than three years. Investors are betting on more aggressive rate hikes in the coming months after Federal Reserve Chair Jerome Powell vowed tough action to rein in inflation during a recent speech at the National Association for Business Economics.

The US government has stepped on the gas to drive up interest rates to contain inflation. The US Consumer Price Index jumped by 8.5 percent on a yearly basis in March, touching a 40-year-high due to rising oil, food and housing costs. The growth beat market expectations of 8.4 percent.

However, Chinese experts criticized the US for shifting the burden of its own economic problems to global markets.

"The US is letting global markets pay the price for its own crisis of inflation, depending on the dominant role of the US dollar and the integration of the global economy," Li Haidong, a professor from the China Foreign Affairs University, told the Global Times.

According to Li, the countries holding massive US dollar assets will feel the pinch from Fed's tightening, but the blow will be even more vital for countries that have a vulnerable social system, as the US action might bring havoc to social stability there.

He also said that when the US government sees a clash between its global responsibility and its own interests, it does not feel guilt in choosing the latter.

"The US' role in the world is turning from that of a protector to a kind of damager, as it thinks that globalization is bad for its own interests," Li said.

Even countries that are in the same league as the US won't escape the US' profit-seeking moves, experts said.

Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times that the US is adding fuel to the flames of the Ukraine crisis, in order to strengthen its position in the so-called Western alliance, as well as further enhance the role of the greenback after investors saw Europe was not secure.

A direct consequence of this strategy is a weaker EU, both businesswise and politically, as the region's independence is undermined, while the military chaos also hurts the region's energy supplies and the euro's attraction to international investors.

Xi said that US monetary policy shifts will put pressure on the Chinese mainland's financial markets, especially as the mainland expands connections with the Hong Kong stock market, which is more vulnerable to US financial volatility.

However, Xi stressed that the impact on the mainland markets won't be severe because of capital flow restrictions, and China's independent monetary policy will not be swayed by external factors like the US Fed's decisions.

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Friday, June 15, 2018

US Federal Reserve rate rise, Malaysia and regional equity markets in the red


Fed’s big balance-sheet unwind could be coming to an early end


NEW YORK: The Federal Reserve’s balance sheet may not have that much further to shrink.

An unexpected rise in overnight interest rates is pulling forward a key debate among US central bankers over how much liquidity they should keep in the financial system. The outcome will determine the ultimate size of the balance sheet, which they are slowly winding down, with key implications for US monetary policy.

One consequence was visible on Wednesday. The Fed raised the target range for its benchmark rate by a quarter point to 1.75% to 2%, but only increased the rate it pays banks on cash held with it overnight to 1.95%. The step was designed to keep the federal funds rate from rising above the target range. Previously, the Fed set the rate of interest on reserves at the top of the target range.

Shrinking the balance sheet effectively constitutes a form of policy tightening by putting upward pressure on long-term borrowing costs, just as expanding it via bond purchases during the financial crisis made financial conditions easier. Since beginning the shrinking process in October, the Fed has trimmed its bond portfolio by around US$150bil to US$4.3 trillion, while remaining vague on how small it could become.

This reticence is partly because the Fed doesn’t know how much cash banks will want to hold at the central bank, which they need to do in order to satisfy post-crisis regulatory requirements.

Officials have said that, as they drain cash from the system by shrinking the balance sheet, a rise in the federal funds rate within their target range would be an important sign that liquidity is becoming scarce.

Now that the benchmark rate is rising, there is some skepticism. The increase appears to be mainly driven by another factor: the US Treasury ramped up issuance of short-term US government bills, which drove up yields on those and other competing assets, including in the overnight market.

“We are looking carefully at that, and the truth is, we don’t know with any precision,” Fed chairman Jerome Powell told reporters on Wednesday when asked about the increase. “Really, no one does. You can’t run experiments with one effect and not the other.”

“We’re just going to have to be watching and learning. And, frankly, we don’t have to know today,” he added.

But many also see increasingly scarce cash balances as at least a partial explanation for the upward drift of the funds rate, and as a result, several analysts are pulling forward their estimates of when the balance sheet shrinkage will end.

Mark Cabana, a Bank of America rates strategist, said in a report published June 5 that Fed officials may stop draining liquidity from the system in late 2019 or early 2020, leaving US$1 trillion of cash on bank balance sheets. That compares with an average of around US$2.1 trillion held in reserves at the Fed so far this year.

Cabana, who from 2007 to 2015 worked in the New York Fed’s markets group responsible for managing the balance sheet, even sees a risk that the unwind ends this year.

One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.

The requirement, known as the Liquidity Coverage Ratio, says banks must hold a certain percentage of their assets either in the form of cash deposited at the Fed or in US Treasury securities, to ensure they have enough liquidity to deal with deposit outflows.

The Fed flooded the banking system with reserves as a byproduct of its crisis-era bond-buying programs, known as quantitative easing, to stimulate the economy. The money it paid investors to buy their bonds was deposited in banks, which the banks in turn hold as cash in reserve accounts at the Fed.

In theory, the unwind of the bond portfolio, which involves the reverse swap of assets between the Fed and investors, shouldn’t affect the total amount of Treasuries and reserves available to meet the requirement. The Fed destroys reserves by unwinding the portfolio, but releases an equivalent amount of Treasuries to the market in the process.

But if Fed supervisors are telling banks to prioritise reserves, that logic no longer applies. Nelson asked Randal Quarles, the Fed’s vice-chairman for supervision, if this was the Fed’s new policy. Quarles, who was taking part in a May 4 conference at Stanford University, said he knew that message had been communicated and is “being rethought”.

If Fed officials do opt for a bigger balance sheet and decide to continue telling banks to prioritise cash over Treasuries, it may mean lower long-term interest rates, according to Seth Carpenter, the New York-based chief US economist at UBS Securities.

“If reserves are scarce right now, and if the Fed does stop unwinding its balance sheet, the market is going to react to that, a lot,” said Carpenter, a former Fed economist. “Everyone anticipates a certain amount of extra Treasury supply coming to the market, and this would tell people, ‘Nope, it’s going to be less than you thought’.” — Bloomberg

Malaysia and regional equity markets in the red


In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

PETALING JAYA: It was a sea of red for equity markets across the region after the Federal Reserve raised interest rates by a quarter percentage point to a range of 1.75% to 2% on Wednesday, and funds continued to move their money back to the US. This is the second time the Fed has raised interest rates this year.

In general, markets weren’t down by much, probably because the rate hike had mostly been anticipated. Furthermore for Asia, the withdrawal of funds has been taking place over the last 11 weeks, hence, the pace of selling was slowing.

The Nikkei 225 was down 0.99% to 22,738, the Hang Seng Index was down 0.93% to 30,440, the Shanghai Composite Index was down 0.08% to 3,047.34 while the Singapore Straits Times Index was down 1.05% to 3,356.73.

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

Meanwhile, the Fed is nine months into its plan to shrink its balance sheet which consists some US$4.5 trillion of bonds. The Fed has begun unwinding its balance sheet slowly by selling off US$10bil in assets a month. Eventually, it plans to increase sales to US$50bil per month.

With the economy of the United States showing it was strong enough to grow with higher borrowing costs, the Federal Reserve raised interest rates on Wednesday and signalled that two additional increases would be made this year.

Fed chairman Jerome H. Powell in a news conference on Wednesday said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

Rate hikes basically mean higher borrowing costs for cars, home mortgages and credit cards over the years to come.

Wednesday’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75% to 2%. The last time the rate reached 2% was in late 2008, when the economy was contracting.

“With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions,” said Anthony Dass, chief economist in AmBank.

Dass expects the policy rate to normalise at 2.75% to 3%.

“Thus, we should potentially see the yield curve invert in the first half of 2019,” he said.

So what does higher interest rates mean for emerging markets?

It means a flight of capital back to the US, and many Asian countries will be forced to increase interest rates to defend their respective currencies.

Certainly, capital has been exiting emerging market economies. Data from the Institute of International Finance for May showed that emerging markets experienced a combined US$12.3bil of outflows from bonds and stocks last month.

With that sort of global capital outflow, countries such as India, Indonesia, the Philippines and Turkey, have hiked their domestic rates recently.

Data from Lipper, a unit of Thomson Reuters, shows that for the week ending June 6, US-based money market funds saw inflows of nearly US$34.9bil.

It makes sense for investors to be drawn to the US, where the economy is increasingly solid, coupled with higher yields and lower perceived risks.

Hong Kong for example is fighting an intense battle to fend off currency traders. Since April, Hong Kong has spent at least US$9bil defending its peg to the US dollar. Judging by the fact that two more rate hikes are on the way this year, more ammunition is going to be needed.

Hong Kong has the world’s largest per capita foreign exchange reserves – US$434bil more in firepower.

By right, the Hong Kong dollar should be surging. Nonetheless, the currency is sliding because of a massive “carry trade.”

Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the US, where 10-year Treasury yields are near 3%.

From a contrarian’s perspective, global funds are now massively under-weighted Asia.

With Asian markets currently trading at 12.3 times forward price earnings ratio, this is a reasonable valuation at this matured stage of the market.

By Tee Lin Say StarBiz

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Wednesday, June 15, 2016

Dealing with the new abnormal negative interest rate policies with exceptional high debt

Negative rates: ECB president Mario Draghi at the Brussels Economic Forum on Thursday. The ECB and Bank of Japan are already experimenting with negative interest rate policies. – Reuters


HOW can this be normal?

Twenty-nine countries with roughly 60% of the world’s GDP have monetary policy rates of less than 1% per annum. The world is awash with debt, with sovereign, corporate and household debt of over US$230 trillion or roughly three times world GDP.

To finance their large debt and deal with deflation, both the European Central Bank (ECB) and Bank of Japan are already experimenting with negative interest rate policies (NIRP). If these do not work, look out for helicopter money, which means central bank funding of even larger fiscal deficits.

Either way, at near zero interest rates, the business model of banks, insurers and fund managers are broken. Deutschebank’s CEO has recently warned that European bank profits will struggle more as negative interest rates play into deposit rates. No wonder bank shares are trading below book value.

The problem with the current economic analysis is that no one can ascertain whether exceptionally low interest is a symptom or a cause of deep chronic malaise. Exceptionally high debt burden can only be financed by exceptionally low interest rates. The Fed now feels confident enough to raise interest rates, which means that the US asset bubbles will begin to deflate, spelling trouble to those who borrow too much in US dollars, which would include a number of emerging markets.

As Nomura chief economist Richard Koo asserts, the world has followed Japan into a balance sheet recession, with the corporate sector refusing to invest and consumer/savers too worried about outcomes to spend. The solution to a balance sheet (imbalanced) story is to re-write the balance sheet, which most democratic government cannot do without a financial crisis. 

Like Japan, China’s dilemma is an internal debt issue of left hand owing the right hand, since both countries are net lenders to the world. This means that foreigners cannot trigger a crisis by withdrawing funds. The Chinese national balance sheet is also almost unique because the financial system is largely state-owned lending mostly (about two thirds) to state-owned enterprises or local governments. The Chinese household sector is also lowly geared, with most debt in residential mortgages and even these were bought (until recently) with relatively high equity cushions.

Unlike the US federal government which had a net liability of US$11 trillion or 67% of GDP at the end of 2013, the Chinese central government had net assets of US$4 trillion or 42% of GDP. Chinese local governments had net assets of a further US$11 trillion or 123% of GDP, compared to US local government net assets of 45% of GDP. Local governments hold more assets than central or federal government because most state land and buildings belong to provincial or local authorities.

Thus, unlike the US where households own 95% of net assets in the country, Chinese households own roughly half of national net assets, with the corporate sector (at least half of which is state-owned) owning roughly 30% and the state the balance. In total, the Chinese state owns roughly one-third of the net assets within the country, compared to net 4% for the US federal and state governments.

Sceptics would argue that Chinese statistics are overstated, but even if the Chinese state net assets are halved in value (because land valuation is complicated), there would be at least US$7.5 trillion of state net assets (net of liabilities) or 82% of GDP to deal with any contingencies.

Furthermore, unlike the Fed, ECB or Bank of Japan, the People’s Bank of China derives its monetary power mostly from very high levels of statutory reserves on the banking system, which is equivalent to forced savings to finance its foreign exchange reserves of US$3.2 trillion. Thus, the central bank has more room than other central banks to deal with domestic liquidity issues.

What can be done with this high level of state net assets, which is in essence public wealth? My crude estimate is that if the rate of return on such assets can be improved by 1% under professional management, GDP could be increased by at least 1.5 percentage points (1% on 165% of GDP of net state assets).

How can this re-writing of the balance sheet be achieved? There are two possibilities. One is to allow local governments to use their net assets to deleverage their own local government debt and their own state-owned enterprise debt. This could be achieved through professionally managed provincial level asset management/debt restructuring companies.

The second method is inject some of the state net assets into the national and provincial social security funds as a form of returning state assets to the public. People tend to forget that other than the painful restructuring of state-owned enterprises in the late 1990s, which led to the creation of China’s global supply chain, the single largest measure to create Chinese household wealth was the selling of residential property at below market prices to civil servants.

The size of the wealth transfer was never officially calculated, but it paved the way for boosting of domestic consumption by giving many households the beginnings of household security.

The injection of state assets into national and social security funds was not achieved in the 1990s, because the state of provincial social security fund accounting was not ready. But if China wants to boost domestic consumption and improve healthcare and social security, now is the time to use state assets to inject into such funds.

At the end of 2014, Chinese social security fund assets amounted to 4 trillion yuan, compared with central government net assets of 27 trillion yuan (Chinese Academy of Social Science data, 2015). Hence, the injection of state assets (including injection by provincial and local government) into social security funds as a form of stimulus to domestic consumption and more professional management of public wealth is clearly an affordable policy option.

In sum, at the individual borrower level, there is no doubt an ever increasing leverage ratio in China is not sustainable. But the big picture situation is manageable. If the policy objective is to improve overall productivity (and GDP growth) by improving the output of public assets, the timing is now.

By Tan Sri Andrew Sheng who is Distinguished Fellow, Asia Global Institute, University of Hong Kong.


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Monday, March 21, 2016

Foreign funds comeback, rising interests in Malaysian properties and equities

Foreign interest in Malaysian real estate picks up: Knight Frank


KUALA LUMPUR: Foreign investors' interest in Malaysian real estate, particularly commercial property, is picking up due to the weakened ringgit, said Knight Frank Malaysia Sdn Bhd.


"What we are noticing is that given the ringgit is currently at one of its lowest (levels) in the last many years, interest in Malaysian real estate is actually now coming back because people feel there is upside not only in terms of capital value appreciation but also the fact that the ringgit will move back possibly to better levels. We are certainly seeing this," its managing director Sarkunan Subramaniam told reporters at a briefing on Knight Frank's The Wealth Report 2016 yesterday.

Executive director James Buckley said it has been seeing interest from the Middle East and the US who are typically opportunistic investors attracted by the currency play here which, combined with the slightly subdued property market fundamentals, makes it a good time for them to enter the market.

"I've got two significant groups coming this week ... one from the US, one from Japan. It's a regular basis now and has been picking up from last year. A lot of them are doing initial trips to understand the market a bit better. They are really focused on commercial investments so the office market, retail market and some are interested in hospitality assets as well," he said.

Buckley said in the past, foreign investors investing in Malaysia were typically from Japan and the growing interest from the US is surprising as the Malaysian market is small compared with the US market.

He said these investors are attracted by the currency and the slight oversupply of office space in Kuala Lumpur.

"It is a good time for them to negotiate some good deals here," Buckley said, adding that most of the foreign interest in Malaysia come from Korea, Japan, Singapore and the Middle East.

Meanwhile, the trend among local property investors is also changing, with interest moving from office space and agricultural land to office, retail and hospitality assets. However, residential property remains the core real estate investment for Malaysians.

"In the global context, interest in commercial property is growing quite strongly. What came out of The Wealth Report is that 47% of UHNWIs (ultra high net worth individuals) are expecting to increase their allocation in commercial property. In the Malaysian perspective, we do see a gradual rise in the interest in commercial property. Particular popular choices for Malaysians are office and retail investments, and they are looking to increase their exposure to these assets over the next 10 years," said Buckley.

He said there is a misconception that investing in commercial property is more complicated while some feel they lack experience investing in this sector but interest is picking up as investors are becoming more familiar with the market and understand better the benefits of investing in commercial property.

The report showed that Malaysian high net worth individuals (65% of survey respondents) have increased their asset allocation to residential property.

Moving forward, 65% of Malaysian survey respondents said they will increase asset allocation to residential property in the next 10 years.

In terms of property purchases this year, 39% of Malaysian UHNWIs said they are considering residential purchases. This is more than 29% of global UHNWIs who intend to buy residential property this year.

On average, Malaysian UHNWIs own more properties (4.7) compared with the global and regional average of 3.7 and 3.92 respectively. As for overseas investments, the top three locations for Malaysian investors are Australia (Melbourne), the UK (London) and Singapore.

Bulls making a comeback


Foreign funds are putting money in emerging markets


HUMAN beings have a natural tendency to fear heights – it’s a natural survival instinct which worked well in the wilderness and in the outback, but one which severely plays against us when it comes to the stock market.

Seven years ago, back in early 2009, these were some of the top financial headlines in the US:

> Georgo Soros says US banks ‘basically insolvent’

No one knew it then, but the Dow Jones was about to embark on a seven-year bull run and would gain some 92% over that period. Riding along was the FBM KLCI, which gained 85% over the same period.

For sure the ride has been bumpy and riddled with sharp corrections. But for investors who held on to their stocks, they would have been rewarded with handsome returns.

For any investor invested in the market – volatility will always be there. But as long as they are able to endure the frailty and fluctuations of the market, the long-term rewards historically outweigh the short-term fickleness.

We have heard it many times before – the best time to own stocks is when sentiment is at its worst,

This was especially apparent in early 2009 when the US economy was on the brink of a banking collapse, In those dark days, there were more forecasts of Black Mondays than predictions of light at the end of the tunnel.

Eng: ‘The market has had a good run since January.’
Eng: ‘The market has had a good run since January.’

The stock market, as always, had a mind of its own. Despite the proclaimation of dooms and the fall of many American banks, the Dow was heading almost on a straight upward trajectory by mid-March 2009. 

Sir John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

That was true seven years ago, 50 years ago, and definitely just as true today.

Logically speaking, what comes down must go up.

Earnings can still be nasty, but doesn’t the market always behave a year forward. At the heart of it all, the market is made up of buyers and sellers. All it takes are a few buyers during a down period to sniff out an opportunity, and suddenly, the market is edging upwards.

It’s the same story with oil prices. Do not expect the coast to be completely clear – for example no more excess inventories, oil demand significantly outpacing supply or the Organisation of the Petroleum Exporting Countries (Opec) deciding to cut production by 50% – before we see oil prices moving up.

By the time these signs are crystal clear, oil prices have made new highs months ago.

In any case, last week the International Energy Agency (IEA) said that oil prices had bottomed out due to US and other output cuts outside the Middle East-dominated Opec.

The US rig count fell for a 12th straight week last week to a total of 386, its lowest since December 2009 as drillers continue to slash capital expenditure.

Zulkifli: ‘These are still early days of a recovery. People are still sceptical ...’
Zulkifli: ‘These are still early days of a recovery. People are still sceptical ...’

The problem now is that after a seven-year run, investors are getting nervous. Investors have mostly been in a flux wondering where the market is heading. Most investors are waiting for the crash to come. They talk about a sluggish economic outlook, falling earnings, recessions in commodity-heavy nations, slowing growth in China, negative interest rates, the end of quantitative easing in the US, the UK (potential Brexit) and flatter yield curves. 

Has the market stalled and lost some of its stamina? With the expectation only of mediocre growth and low yields, is it time to sell stocks?

Behind the scenes, some under-appreciated indicators are starting to show some light.

First of all, the ringgit has been strengthening – a reflection of foreign money coming back to Malaysia. It strengthened 0.6% this week to RM4.09 against the greenback.

Last week, foreigners bought listed equities amounting to RM1.04bil on Bursa Malaysia, higher than the RM972.2mil acquired in the preceding week. To date, there are some 12 consecutive weeks of total net inflows and brings cumulative year-to-date foreign purchases to RM1.6bil.

For the entire 2015, there was a net outflow of RM19.5bil.

Meanwhile the FBM KLCI closed at 1,703.19 on Thursday, which is also its six-month month high. The seven-month high is 1,744.19 recorded on Aug 3, 2015.

From a charting perspective, a recovery in the FBM KLCI appears to be playing out.

“We reiterate our view that KLCI must close above 1700 levels convincingly to sustain the ongoing rally from 1600, with key upside target at 1710 (March 7 high), 1727 (Oct 19 high) and 1740 (200-day simple moving average) levels. Failure to close above 1700 will see the index continue its short-term congested range-bound consolidation within the 1660-1700 territory,” says Hong Leong analyst Nick Foo.

Etiqa Insurance & Takaful head of research Chris Eng, on the other hand, feels that the market is toppish for now.

“The market has had a good run since January. It may have a few more legs to run, but come April, it will be earnings results in the US, and in May, it will be earnings result in Malaysia. We aren’t expecting very positive earnings coming out, so market may start falling again by April,” says Eng.


From a trading perspective, he would ask clients to sell into strength.

On a fundamental perspective, however, he isn’t expecting a recession, well at least not this year. He would still advice investors to stay invested in equities.

“We are expecting some weakness in the market come middle of the year. That would be a better time to buy. We would identify that weakness and look for opportunities then,” says Eng.

MIDF Research has been recommending its clients to start buying since the start of the fourth quarter last year.

“These are still early days of a recovery. People are still sceptical, especially retail investors. But we have been tracking the money flows, and foreigners have been net buyers every single day of the 14 trading days so far this month, which is a phenomenon not seen in more than two years” said Zulkifli Hamzah, head of MIDF Research.

According to Zulkifli, the Malaysian equity market is benefiting from a tide of global liquidity flowing into Asia. Some of the money is actually global funds in China, being reallocated to other Asian markets as the outlook in Asia’s biggest economy is challenging.

“In the bond market, Malaysia started to look attractive to the foreigners as early as September last year. The low global interest rate environment, with negative rates in some countries, has made local yields very attractive indeed. That is reinforced by the depressed Ringgit,” said Zulkifli.

“Overall, we are positive on the market. Sceptism of the market has been partly due to the relatively restrained climb in the index. But this has been due to selling by local funds, which are understandably taking the opportunity of the market’s upward march to realize their profits. We also do not expect to see such a steep incline in the indices because of rotational forces at work,”

“Global investors are not going to come in and buy blindly across the board although the Ringgit is seen as undervalued. They will be selective and buy only those stocks that they see value. We believe the current uptrend has legs. However, there are potential potholes which may cause temporary retracement, at which point it would be opportune to enter the market,” said Zulkifli.

He added that the changing of guard in Bank Negara and the Sarawak state election would be closely watched by foreigners.

No rate hike is good for Malaysia

On Wednesday, Federal Reserve officials lowered their view of the economy and said they likely won’t raise interest rates as swiftly as they had previously anticipated as there are lingering risks posed by soft global growth and financial-market volatility.

Policy makers left short-term interest rates steady and said they would raise their benchmark rate just twice this year, after an initial increase in December 2015, down from the four they previously predicted.

Last week European Central Bank (ECB) chief Mario Draghi announced a much bigger and wider-ranging stimulus package than anyone had expected

He increased his purchases of financial assets by a hefty 20 billion euros per month (from 60 billion-80 billion euros), pushed interest rates lower into negative territory (by 10 basis points), improved financing for the banks and announced his intention to buy investment grade corporate bonds.

In other words, the ECB will pay banks 0.4% to lend. This puts the eurozone in a negative interest-rate situation.

This move inevitably makes Malaysia more attractive.

Recessionary pressures and low interest rates in the US are a boon for emerging markets like Malaysia. This is further helped by economies like Japan and China which are continuing to cut interest rates to kickstart their economies.

With US and eurozone interest rates having stayed in negative territory for so long, and doubts on future rate hikes, investors are getting desperate for yields.

So they come to Malaysia, where the average yield on a 10-year dollar bond is higher by some 140 basis points than a similar US Treasury 10-year note.

Also, after a torrent of bad news, some confidence is returning to Malaysia.

Last month, Fitch Ratings affirmed Malaysia’s long-term foreign and local-currency issuer default ratings (IDRs) at A- and A respectively, with stable outlook.

Malaysia’s senior unsecured local-currency bonds were also affirmed at A while the country ceiling was affirmed at A and the short-term foreign-currency IDR at F2.

The three rating agencies – Moodys, S&P and Fitch Ratings – have given the same credit rating of between A3 and A- with stable outlook for Malaysia.

Bank Negara also announced that Malaysia’s economy grew by 4.5% in the final quarter of last year, which was better than expected. This brings the full-year gross domestic product growth to 5% from 6% in 2014.

The recent stability in the ringgit was also a positive factor for foreign investors, and this has taken away some of the foreign exchange risk of investing here.

The ringgit is the best-performing emerging-market Asian currency over the past three months, having been one of the worst performers last year. Year-to-date, the ringgit has gained 2.05% against the US dollar.

The economy is on a better footing now that the Government has revised its budget based on oil prices between US$30 and US$35, and the country is on track to achieve its targeted budget deficit of 3.1%.

by Tee Lin Say The Star

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