Economics

Asia: cyclical dashboard

DBS Group Research 14 February 2013

We expect Asia-10 growth to accelerate to 7.3% this year from 6.2% in 2012 How is the forecast tracking? Quite well. Exports are picking up. Industrial production has been surging for five months Faster investment growth in China this year will be the key driver, we think. A surge in January loan growth supports that plank Rising capital inflows and lower interest rates will help push faster growth too

As discussed regularly over the past two months, we expect GDP growth in the Asia-10 to accelerate to 7.3% in 2013 from 6.2% in 2012 [1]. How are the data progressing are things on track? The two big gauges that always dominate the Asia dashboard are exports and industrial production (below left and right). Cyclically, they look very much on track and very much in synch. The first thing to notice about exports (below left), is that they havent fared anywhere nearly as badly as the media have portrayed things over the past year. Not only did the slowdown start way back in 1Q11 (i.e., not in 2012) but exports have grown at a fairly steady 10% clip ever since (chart below left). All the way up until January 2013, that is. Then, (based on data from China, Korea and Taiwan) they took a sharp turn northward.

Asia 9 - exports
US$ bn/mth, sa 425 400
Jan11 Jan13

Asia 9 and US industrial production

Jan08=100, sa, simple avg for Asia 122 118 114 110
Jan12

Dec12 Jan11

375 350 325 300 275 250 225 200 Jan-08 Jan-09 Jan-10
Exports have grown at a 10% clip ever since 1Q11. Jan13 hints at acceleration, but Chinese New Year is always a problem.

Jan12

106 102 98 94 90 86 82 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 US US Asia 9

Jan-11

Jan-12

Jan-13

David Carbon (65) 6878 9548 davidcarbon@dbs.com

Asia: cyclical dashboard

14 February 2013

The trouble with January (and February) data in Asia, as most are aware, is that Chinese New Year wreaks havoc with it. Sometimes its celebrated in January and sometimes in February. You need twice as much data to figure out whats truly going on as you do with, say, Christmas, which always falls in December. This year, a lot of Greater China exports were pushed into January and February is likely to show some payback. Exports are off to a very strong start in 2013, notwithstanding the Chinese New Year effect That said, the Jan/Feb reverberations havent been all that large in recent years and if they are proportional this year, then Asia is off to a roaring start on the export front. Keep your fingers crossed. Well have the true story only in March.

Industrial production
The other big gauge on the dashboard is industrial production (IP; chart on p1 right). Its still the best single indicator of the cycle in Asia (and most other countries too for that matter). What is it saying? About the same thing that exports are. Asias slowdown came way back in early-2011 (or before in the case of IP) and growth has run fairly steadily ever since. IP has been more volatile than exports over the past two years, to be sure, but the growth trend has been strong and clear. And, like exports, things are picking up on the margin. Production has been surging for the past five months (taking the Chinese New Year effect out of the equation) and is now pushing the upper bounds of the range it has travelled for the past two years. January and February data will likely be inconclusive when they arrive. But as of December, production is on a tear and augurs very well indeed for a faster 2013.

IP has been surging for 5 months

The drivers
The dashboard offers a reassuring check from the data. But theyre not the drivers, per se, of the stronger 2013. We think there are three main things that will be responsible for the faster growth this year and its worth mentioning them briefly here (for more detail, see [1]). The biggest driver, we think, will be a pick-up in investment growth in China. Last year growth was extraordinarily low much lower than would follow from a simple/gradual shift to consumption-led growth (chart below) Other factors that kept investment low were the leadership transition, high profile criminal trials and international disputes over offshore island territories. Few invest until

China fixed asset investment

% YoY
31

30
28 26 26 25

GFC: +5%
25

27

25

20

Today -6%

20

15

10 2005 2006 2007 2008 2009 2010 2011 2012

Asia: cyclical dashboard

14 February 2013

they know the score and the plan and investment should look much stronger once that is made public. Judging from the January loan growth data, the master plan may already be leaking out all over. Loan growth jumped by some 1.1 trillion yuan, the biggest one month surge in three years. Whether it lasts or not remains to be seen. But it certainly looks like the new leadership wants to put its stamp on the country and as they say in the West, theres no time like the present. Is this enough to kick Chinas and Asias GDP growth up a notch in 2013? Absolutely. Investment growth accounted for two-thirds of Chinas GDP growth in 2011 [2]. Moreover, in dollar (or yuan) terms, investment growth in China alone in 2011 was 30% greater than all the GDP growth in all the other Asian countries combined. So yes, investment and loan growth is enough to drive the overall picture. This is the main reason we look for 9% GDP growth in China this year and for Asia-10 GDP growth to rise to 7.3% from 6.2% last year.

Chinas Jan loan growth was the strongest in three years

Smaller impacts
Faster Asian growth is not all about China. Interest rates in the Asia-10 have been cut 18 times over the past 5 quarters and they had never got back to normal heights to begin with in the aftermath of the global financial crisis. They are perhaps two-thirds their normal height at present and this will provide some of the fuel to kick growth up to 7.3% in 2013. Inflows will provide the rest. Over the past two quarters, capital has flowed in Asia to the tune of $1bn per day. Thats not like the heydays late-2010 and early2011 but its a lot more than zero inflow average that prevailed for the four quarters from 3Q11 to 2Q12. Stronger inflows will ease liquidity and relax constraints on growth that would otherwise come from deteriorating external balances. This will provide the third boost to Asia-10 GDP growth that we anticipate this year.

China loan growth

RMB bn, nsa 1,200 1,000 800 600 400 200 0 Jan-11
RMB1089

Asia 10 rise in foreign reserves

US$bn per quarter, includes fwd ccy 350 300 250 200 150 100 50 0 -50 -100 -150
3Q, 4Q avg rise: $80bn/ qtr

Jul-11

Jan-12

Jul-12

Jan-13

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Notes
[1] See Asia: towards a better 2013, 18Jan13. [2] Data for 2012 are not yet available.

Sources
Data for all charts and graphs come from CEIC and Bloomberg. Estimates are DBS Group Research.

Asia: cyclical dashboard

14 February 2013

GDP & inflation forecasts

GDP growth, % YoY 2009
US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* -3.5 -5.5 -4.4 4.6 -1.6 1.0 -1.0 -2.3 5.3 9.2 -2.7 -1.8 0.3 8.3

CPI inflation, % YoY 2013f

2.0 1.0 -0.3 6.3 5.0 6.0 3.2 5.0 5.6 9.0 5.0 4.2 3.5 6.5

2010
3.0 4.5 1.9 6.1 7.2 7.3 14.8 7.8 6.8 10.3 7.0 10.7 6.2 8.4

2011
1.8 -0.6 1.6 6.5 5.1 3.9 5.0 0.1 5.9 9.3 4.9 4.1 3.6 6.5

2012e
2.3 1.6 -0.4 6.2 5.2 6.6 1.6 5.5 5.1 7.8 1.5 1.3 2.0 5.5

2009
-0.3 -1.3 0.3 4.8 0.6 4.2 0.6 -0.8 7.0 -0.7 0.5 -0.9 2.8 3.6

2010
1.6 -0.7 1.6 5.1 1.7 3.8 2.8 3.3 9.2 3.3 2.4 1.0 2.9 9.6

2011
3.1 -0.3 2.7 5.4 3.2 4.8 5.2 3.8 18.6 5.4 5.3 1.4 4.0 8.9

2012e
2.1 0.0 2.6 4.3 1.7 3.1 4.6 3.0 9.3 2.6 4.0 1.9 2.2 8.0

2013f
1.9 0.0 2.5 4.9 2.8 4.1 4.0 3.6 7.3 3.5 3.5 1.3 2.5 7.4

* India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research

Policy & exchange rate forecasts

Policy interest rates, eop
current US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam^ China* Hong Kong Taiwan Korea India 0.25 0.10 0.75 5.75 3.00 3.50 n.a. 2.75 9.00 6.00 n.a. 1.88 2.75 7.75 1Q13 0.25 0.10 0.50 5.75 3.00 3.50 n.a. 2.75 10.00 6.00 n.a. 1.88 2.75 7.75 2Q13 0.25 0.10 0.50 5.75 3.00 3.50 n.a. 2.75 10.00 6.00 n.a. 1.88 2.75 7.50 3Q13 0.25 0.10 0.50 5.75 3.00 3.50 n.a. 2.75 9.00 6.00 n.a. 1.88 2.75 7.25 4Q13 0.25 0.10 0.50 5.75 3.00 3.75 n.a. 3.00 9.00 6.25 n.a. 2.00 3.00 7.00 current 93.5 1.339 9,667 3.09 40.6 1.24 29.8 20,840 6.23 7.76 29.6 1084 53.9

Exchange rates, eop

1Q13 93 1.32 9,400 3.00 40.4 1.22 30.3 20,750 6.19 7.76 29.3 1060 54.5 2Q13 96 1.33 9,300 2.97 40.1 1.21 30.0 20,750 6.15 7.78 29.1 1050 54.0 3Q13 99 1.35 9,200 2.93 39.7 1.20 29.8 20,750 6.11 7.79 28.8 1040 53.5 4Q13 102 1.36 9,100 2.90 39.3 1.19 29.5 20,750 6.07 7.80 28.6 1030 53.0

^ prime rate; * 1-yr lending rate

Market prices
Policy rate Current (%) US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand China Hong Kong Taiwan Korea 0.25 0.10 0.75 5.75 3.00 3.50 Ccy policy 2.75 6.00 Ccy policy 1.88 2.75 7.75 10Y bond yield Current 1wk chg (%) (bps) 2.05 0.77 1.67 5.25 3.47 3.99 1.56 3.59 1.28 1.19 3.09 7.82 10 0 7 -1 -5 -17 2 -1 4 119 2 -3 FX Current 80.3 93.5 1.339 9667 3.09 40.6 1.237 29.8 6.23 7.76 29.7 1084 53.9 1wk chg (%) 0.2 0.1 -0.1 0.1 0.0 0.0 0.2 -0.1 0.0 0.0 -0.4 0.4 -1.3 Index S&P 500 Topix Eurostoxx JCI KLCI PCI FSSTI SET S'hai Comp HSI TWSE Kospi Sensex Equities Current 1,520 955 2,633 4,595 1,632 6,513 3,295 1,523 2,432 23,389 7,907 1,980 19,575 1wk chg (%) 0.5 -1.4 1.1 2.0 -0.1 0.8 0.7 1.6 0.6 -1.2 #DIV/0! 2.2 0.0

India Source: Bloomberg

Asia: cyclical dashboard

14 February 2013

Recent research
IN: Exception to the rule CNH: Eclipsing the NDF market JP: USD/JPY to go triple-digit Asia: Weaker JPY does not imply weaker AXJ US unemployment: Which trend is your friend? ID: Fuel price pressures Asia: towards a better 2013 SG: Lowering property market risk KR/TW: Is yen depreciation a big worry? Asia: Curves pricing interest rate risk TH: Government-sponsored growth US: 2013 inflation risks? Not so much Qtrly: Economics-Markets-Strategy 1Q13 JP: Gauging the QE impact ID: Foreign interest returns CN: How efficient is Chinas investment? US: Deleveraging progress report CN: The importance of industrial policy in the rebalancing process CNH: How will HK maintain its RMB edge? Asia: 3 questions CN: Pessimism misplaced SG: Recession and competitiveness 6 Feb 13 4 Feb 13 31 Jan13 TW: Thoughts on CNT prospects ID: What does QE3 mean for Indonesia Qtrly: Economics-Markets-Strategy 4Q12 US Fed: Bernanke's setup 30 Jan 13 ID: Rates under upward pressure 29 Jan 13 23 Jan13 18Jan13 18Jan13 AUD: volatile in a stable range 18Jan13 SG: Stagflation 15 Jan13 14 Jan13 27 Dec12 13 Dec 12 30 Nov 12 ID: Trade, commodities and imports 19 Nov 12 US: Another downgrade 12 Nov 12 30 Oct 12 29 Oct 12 Asia: Volatile capital flows cloud bond market outlook Asia: Global recovery dashboard IN: Capital flows, inflation to hurt INR 25 Oct 12 CN: Exporting more to Africa and LATAM 16 Oct 12 CNH: Beijing moves to boost HKs edge 11 Oct 12 CNH: Hong Kongs dominant role to remain 2 Oct 12 Qtrly: Economics-Markets-Strategy 3Q12 14 Jun 12 22 Jun 12 3 July 12 4 July 12 16 July 12 17 July 12 19 July 12 CN: The role of human capital in the rebalancing strategy TW: As low as it gets 25 July 12 1 Aug 12 10 Aug 12 CN: Untangling the fiscal conundrum JP: Not by VAT alone CNH: More than just non-resident conversion 29 Aug 12 28 Aug 12 17 Aug 12 28 Sep 12 19 Sep 12 13 Sep 12 3 Sep 12

13 Aug 12

20 July 12

KR: Implications of rising foreign investment 20 July 12 in KRW bonds

12 July 12 5 July 12

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