You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. China's economy is sputtering. As COVID zero restrictions fell away. Global investors held their breath expecting a powerpacked economic rebound, but so far China's come back from COVID hasn't lived up to the hype.
It's a different story in the US, where the economy shows surprising resilience, leaving the door open for higher rates, but that's not stopping investors from getting excited over the promise of productivity from artificial intelligence.
What does this mean for the dollar, the women Bee and other Asian currencies and what risks lurk in South Korea's financial sector.
Let's bring in Alvin Tan, head of Asia Currency Strategy with RB's Capital Markets.
And Rina Quark Asia Financials credit analysts with Bloomberg Intelligence.
Both join us from Singapore.
Hi Alvin. In June, we had the Federal Reserve Chairman Jerome Powell state that the fight with inflation has a long way to go and indicated two more rate hikes. On the other hand, China just cut interest rates by ten basis points. How do these actions frame your currency view?
Well, on the one hand, of course, that implies that the interest rate differential between China and the US is widening. Of course, that is a fundamental contributor to the women beatz continued appreciation. On the other hand, we also know I mean, of course it's lengthened, but we also know that that is approaching the end of its heightening cycle.
But at this point, the interest rate differential widening between China and the US is still the primary factor, I think, driving dollacy and more higher.
What's your view of the US dollar going forward versus the Asian currencies.
Well, we do think that the US dollar is peaking on a cyclical basis, but this this is quite a drawn out process. I mean, we look at historically the peaks in the dollar tends to be drawn out for many months up sometimes even years in fact, and indeedtail euro dollar at ninety five cents last autumn probably marked the absolute peak the usl for this cycle. But of course the US dollar has not plunged from that, so
again it is a peaking process. It's going to be a drawn out process, and we do think there's still room for the US dollar to gain some ground at least towards your end, particularly against the likes of the Japanese and also against you know, the Romain bit. But it is a peaking process, and we we do foresee that the US dollar will likely commence a more steady decline probably next year.
Alvin as we speak, we are at the doorstep of the second half of twenty twenty three. Let's take a look forward if we can. Lots of factors influencing the market. We've got interest rates, we've got recession risk, We've got this productivity leap that's being promised by AI, or at least you know, that's the general sense. What are going to be the dominant themes, the prevailing narratives going into the second half of twenty twenty three For.
Some of the Asian currencies, this AI narrative is quite important, particularly for the likes of the Korean one and to a less extent time onan dollar. In fact, we've already seen, for example, Samsung and the Chronics Heinex share prices at the highest level since spring of last year, and that has actually helped the Korean one diverge from the rooman
Beza depreciation trend. Over the past two months or so, the Korean one has done relatively well actually quoted date, So I think this will be a contributor to some of the Asian currencies are performing within the Asian currency conflict. Now at the broader level, I think we're also begin to see that the exports slump in Asia is bottoming out. You can see that in the VAT Trade Satistics Advanced
statistics our career. No doubt the trade is still negative on a year on your basis, exports growth in particular still negative in the year on your basis, But I think the bottoming process is happening, and so going forward, I think this AI and at the broader level, the gradual ending of the exports slump can support such an
Asian currency is going forward. I think what's quite interesting also is that although of course China's growth rate growth momentum has disappointed as recently, I think though that as the disappointment piles up on China's part, the chances of more stimulus measures, particularly from the physical side, is actually growing.
So this possibility of further stimulus are China, particularly from the physical side, is going to help end the room in based depreciation trend, particularly gainst the US dollar at some point in the second half of the year, But at this point not yet, because we're still seeing that the government and Bating appears reluctant to really roll out any decisive stimulus measures, particularly on the fiscal side.
Alvin, what decisive measures does the China authorities need to implement to appease global investors? You know, recently we had a ten basis point count that obviously was enough. Can you just give us some more details.
Yes, I think that the LaNese economy currently is suffering from lack of demand and factly lack of confidence on the out of households and to suspend and so, you know, making the price of credit cheaper, perhaps it only helps in the margin, is not going to solve the underlying lack of demand problem. I think that we definitely need
more decisive fiscal measures. For example, one reason why households have been so cautious in China because China actually never had the physcal handouts that was very common and developed countries during the pandemic at all, So households are basically trying to repair balance sheets currently, and so they cautious in the spending, cautious in the borrowing as a result,
of course, that is certing internal demandment in common. So I think you need fiscal measure just as what happened in many the countries during the pandemic itself, like.
Cash handouts basically, right, Yeah, well.
That is one extreme of it. Of course, perhaps more moderate DISCO policies would be the likes of more government spending basically on infrastructure, perhaps on more government projects.
Yes, let's take a deeper dive into China. When China emerged from COVID zero, there was a lot of, for lack of a better word, fanfare optimism over its growth prospects. That light appears to have dimmed a bit. What do you see going forward? And has China's shall we say, stumble out of the gate surprised you?
First of all, yes, certainly the growth momentum has pieced it out a lot faster than I thought it would. But on the other hand, I know because in fact, if you tried to remember back to be called back to what happened in March when the government set its growth target. They at least had the growth target that quote around five percent, so actually it was quite a
modest growth target. And again, if you look at China's economic policies just before the pivot away from COVID, at the beginning of reopening, there were no particularly very large stimulus measures have been put in place. So I think that another one. We're expecting China to grow something like six seven percent. I think that was definitely this guidet in that sense.
Yes, what do you think the authorities can do regarding China's beleagate property sector.
Well, that's the other part where in recent weeks, I would say there's been quite a bit of disappointment because there's a lot of news out and boom Will did the reporting about China was on the verge between the State Council the cabinets, on the verge of announcing various measures to support the property markets, of just reducing mortgage requirements,
reducing limits and second home ownership. But so far it's means weeks now, we haven't gotten any details of any such policies that in particular, the State Council meeting just over two weeks ago, you know, he was expected that something with a murder of their meeting, but instead we just got more promises that more stimulus measures to particularly incite where the demand was forthcoming. So so far even
now we haven't heard anything. And Premier lead he mentioned again that China was on course to meet five percent growth title, which is absolutely true, but that was because of base effects. The government appears to be continuing with a raatively modest growth pilate and their actions speak louder
basically than there are words promising for the stimulus. I think that the market senses that there is a bit of foot dragging here in terms of rolling out more decisive stimulus measures, in turn the economy around.
So for China's currency, the CNY or the CNH, are you a bull or bear?
I would say from here, I'm largely positive on the CNY, but that's like, let's say, taking an eight and twenty four month deal. I think that in the near term, definitely, the depreciation trend is a clear one and it makes sense in fact, if you think about it, the CNY has retained much of its gains from mid twenty twenty, from the bottom of the pandemic turbulence that we saw it market. If you look at, for example, CNY against the Japanese end, it is much much higher, or even
CNY against Korean war. This is no close neighbors. So there is a good argument that the trade weighted CNY can continue to move lower simply because the Chinese economy is definitely underperforming and a weaker currency is again another form of monetary easing. However, long of the term, I am a bit more bullish on the CNY because number one,
China has a persistent current account surface. It's account surface currently is still not two percent of GDP, so that's a fundamental support for the currency in the longer term sets. And secondly, I think that with the depreciation that we've seen over the past year or so, I think it's hard to argue that the remin bee is expensive. Now I think what one could say that is falling into relatively cheap levels. So this is what makes me a
bit more boollish over the medium belong term prospects. But certainly in the near term, the depreciation pressures are art clear, Alvin.
Right now global investors are tiptoeing or treading cautiously around China. There are many reasons for that, what's it going to take for China to attract the attention and generate that global investor interest. Again, is it going to be infrastructure spending, Is it going to be support for the property market or is this something that we're not considering.
I think certainly more the size of managers that support the economic particularly on the property sector, is going to be a part of it. And so to turn that around, essentially we need to see a lessening of the pressures on the property sector, on the property developers. In fact, part of it comes from government used to restrict credit provision to highly interested developers. So I think we definitely
need some easing on those policies. And also beyond that, I think part of the reason why foreign investors have become a wary of China lately is, of course, you know, that stems from the regulatory crack now that of course started with ants one in two years ago, and you know engulf the education and the tutory sectors for example.
So I think a clearer regulatory regime, a more transparent policy making regime in terms of how the government intends to deal particular sectors of the economy, and that it tends to ease this regular crack. Now, I think that's they will be important for foreign investors.
Alvin, you're sitting in Singapore and I noticed that you haven't mentioned anything about Southeast Asian currencies. What's your view there.
I've been quite positive on the Indonesian rupia, and I continue to be positive on the Indonesian mupia. And one reason is that, but partly it is a carry trait. I think we're seeing that volatility in actually EM bonds and EM currencies have fallen quite significantly the course of this year, So I think Indonesia is attractive from that point of view. I think that definitely botes well for
Indonesia's growth and economic prospects. And the other one is I do think that the Singapore dollar, for example, has actually done quite well over the past two years or so, and that's because the Monetary authors Yere of Singapore has PYTHON policies quite significantly over the course of the past two years. Now that, of course, MAS has already stopped.
I think it's definitely paused. Its tightening cycle is over. However, the appreciation settings on the Singapore dollar that were put in place during the course that pythoning remains in place. And so the Singapore dollar I think can continue to do well with those appreciation settings in place, driving it forward modestly, but nonetheless I think that will help with whole its gains of the past two years well.
Alvin. Commercial real estate, especially the office segment, is a big player in developed economies, especially in Asia. Right now, there are some headwinds. Developers are finding it difficult to refinance, of course, due to the higher interest rates. We've got high vacancy rates. You're seeing it here in Hong Kong people working from home. Can you assess how big a risk is at stake here with commercial real estate and how does Asia's situation compare to the rest of the world.
I think when you talk about this, it's important to differentiate between the various countries. Certainly in the commercial census of Hong Kong and Singapore, it is an issue that
loans law. But in cases such as Indonesia to less extent, but still Malaysia or even India for that massive, I don't think it's particularly law problem on the macro level, at least for the economy, and I think the solid these Asian banks are actually quite relatively well capitalized in that sense, and which should help them whether these problems are in my view, but certainly in the more urban, commercial oriented centers of On Kong in particular and also Singapore,
it is likely to be a big question mark going forward.
I think it's a good time to bring in Rena into this discussion. Earlier this year we seem to be on the precipice of a global banking crisis. We had US regional banks fail, especially SVP. We also, you know, across the pond, we had credits with fail in Europe. Are you surprised at how well Asian banks have weathered the storm? Rena?
Thanks for having me, John, Still, how we actually looked at why Asian banks seem to be better placed but not insulated from the global banking crisis that we have seen in March. Now, a couple of credit strengths that we see for the Asian banks. The first thing is most of the major Asian banks they have big capital cushions that allows them to actually what we call the credit losses potential credit losses in them books. Now. The
second thing is that healthy liquidity. Most of the major banks liquidity profiles are likely to remain healthy this year, despite the elevated funding cause, and it seems unlikely to see the similar kind of deposit flight that we've seen in SVB as we see that for Asian banks. Now, the third thing is that as we look for most of the major Asian banks, they actually show up preemptive provisions since the pandemic to cushion their books. So that
helps to actually cushion potential looms pages. Should you know Microhaatemin's person.
Rina Quad, you've written quite a bit about Korean banks from your perch there in Singapore. When you stand out and you gaze across Asia, does Korea stand out in terms of risk to its financial center for better or for worse?
As we turn our focus through the South Korean financial sector, a couple of risks to watch. You know, the whole economy has elevated household that and of course we are facing enterrising interest rate. So in terms of mortgage defrauds and credit card defaults, we believe they could be manageable for the financial sector and stuff career this year, just because the income and the employment conditions continue to be resilient despite the microhat wents that we see in self Korea.
But what is more important is really the non bank financial institutions what we call the mbfies increasing liquidity risks amid the elevated interest rate as well as their riskier project financing exposures seems to be a bigger risk to watch this.
Year, and where the Korean households are also amongst the most indebted in the world.
Right, yes, so if I may just put in note, how do we think about the mortgages defraud and self career? Given that we have really elevated levels of household that and self career, we believe that the mortgages deferred amid the rising interest rate could be manageable as the most outstay one of the crucial factors, such as employment continues to be resiliant. The unemployment rate and STEFF career may
was about two point seven percent. Now risks are also offset by the microprudential measures we have in place in self career to actually avoid a herd lending of the property market. And most of the major of Korean banks they've Empire provisions.
So really can I draw analogies? It sounds like the big Korean banks are okay, but the and similar to the US banks, the big ones are okay, but the smaller ones in the US it's regional banks and create sounds like it's the MBFIS, they're the ones at risk.
Yes, couple of items to watch for the mbf FI. Firstly as the liquidity risk, you know, especially the security companies, the credit specialized financial companies as well as the mutual saving banks as we enter into elevate third interestry, market volatility and a struggling property sector. Now, as of top quarter last year, what we call the regulatory liquidity courage
ratio were well above their regulatory requirements. For the MBFIS, their ratios have actually fallen sharply versus the twenty ninety levels. And particularly if we look into the securities companies as well as the credit specialized financial companies that are actually very vulnerable to market jetas just because they's a huge reliance on short term hostale funding and rina quad.
What about Korean banks credit default swaps? What are they doing now? What's your outlook?
So if we take a look at the what we call the CDs performance of the big four STUF current banks for their five year dollars senior CDs, we believe they could actually remain modestly higher than the twenty twenty one level this year. And this is because you know,
the economy and stock careers facing rising hugments. Right, the soft care economy could be hurt by the exports amid the slow in global growth, the accumulated transmission effects of the tightening by the Central bank last year, as well as the elevated household that as the growing fears of
the financial institution's project financing exposures. Now, if we look closely into the major stuft current banks whoming banks five years seen as CDs might remain tight again its peers just due to a stronger capital position as the bigger system important.
Alvan, I'd love to bring you back on what could go wrong with your faces? Is there any black swan events that you're looking out for.
Well, I suppose the geopolitical as fact is one black swan that people are worried about. And beyond this as reala mentioned the financial sector is a concern in the case of Korea, as we've seen of course in the United States, when you have rising interest rates, you're rising from near zero levels, bad things can happen, Things can
break in the economy. So that's something definitely watch about, and particularly when you have a situation where China is a big giant in the Asia Pacific region is slowing down. That's definitely the higher rates in the non Chinese economy somehow, you know, react with of a slowing demand from China to create a really really negative situation in the region. So definitely that's something that bears watching too.
Yes, having your eye Alvin Tann on Asia's economy. Let's say you could pull over Jerome Powell and tell him a few words whisper something in his ear about interest rates. Maybe it's a piece of advice. What would you tell Jerome Powell, the US FED Chairman?
I would say he has to be careful about moving rates a lot higher from here. But frankly, that's something that the Fed is very concerned about. They've been talking about the banking sector and the risk to the banking sector for a few months now. When you have situations where interest rates are high and rising, when US treasuries are offering over four percent risk free returns, that's going to cost pressure on the banking sector. It's just snails,
it's quite straightforwards. Fundamentally, it will cause pressure on the mangu sector, so that's something the FED needs to keep him very close on.
Sounds to me like you're convinced the FED is just about where it needs to be on rates.
I think it definitely makes sense that the FED has to keep rates where they are, and I'll haul this in fact, that they'll have one more hike, but they'll go stop that, but they'll keep the rates that you know until well on the next year. But it makes sense because the US economy in fact is doing relatively well. If you look that the macro indicators, look at unemployment level, you look at various measures, particularly the housing market appears to be heating up again.
It's showed a lot of resilience, hasn't it.
Yes, absolutely, the housing market in the US has surprised a lot of people by resilience. And because of this and the fact that inflation remains an issue, so the FED has to keep rates where they are for a lot longer, I think.
Mind, I probably just want to talk about how the liquidityly res compare. For Singapore, it was just the big form of current banks because the reason why I said this, the regulator recently revised the LBI required for their current banks to be ninety five percent from ninety two percent effective from July to end of December this year. So we just wanted to point it out what we think
the big four current banks liquidity is still healthy. They are comparatively much weaker than similarated in upon banks.
Okay, great, thanks Verna. Our guests have been Alvin Town of RBC Capital Markets and Rina Quok Asia financials credit analysts with Bloomberg Intelligence. It's been a wide ranging conversation on Korea, China, interest rates, and almost everything in between.
Thank you, Thank you.
I'm Tom Corbett in Hong Kong.
And I'm John Lee. This podcast was edited by Clara Chen and you've been listening to the Asia Centric podcast