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Matthews Asia Country Updates

For the month ending October 2016

China/Hong Kong

In October, the MSCI China Index returned -1.95% and Hong Kong's Hang Seng Index returned -1.41%, both in local currency terms. China's domestic CSI300, the A share index, returned 2.55% in local currency terms (0.99% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.78 against the U.S. dollar. The real effective exchange rate was down 7% year-to-date through the end of September, but was up by 45% from June 2005, when China began to reform its exchange rate mechanism.
In the first three quarters of 2016, new home sales, on a square meter-basis, rose 27.1% year-on-year, after rising 6.9% for all of 2015, and compared to an increase of 8.2% a year ago. Online retail sales of goods rose 25.1% year-on-year through September.

The third quarter data signaled that economic growth has stabilized at a healthy pace, and that China’s transition from a high-speed, heavy industry-based economy to a moderately fast consumer and services-based economy is well underway. The challenges of completing this transition will result in gradually slower growth rates and increased volatility, but we believe the risks of a hard landing are low.


Indian markets were higher in October amid further monetary policy easing by the Reserve Bank of India (RBI), lower-than-expected inflation, and hopes of reviving consumer demand. The S&P Bombay Stock Exchange 100 Index returned 0.47% in U.S. dollar terms (0.73% in local currency terms) led by gains in energy, industrials, and financials.

The RBI reduced interest rates by 25 basis points (0.25%) and signaled a tilt in monetary policy toward economic growth as opposed to inflation going forward. The central bank’s stand was vindicated as growth in the consumer price index (CPI) was reported at 4.31%—far lower than expected. With solid monsoon rainfall acting as a tailwind, investors are likely expecting inflation to remain flat to moderate, raising hopes of further monetary policy easing this fiscal year.

Government officials appointed members of the Monetary Policy Committee (MPC) to set interest rates, moving away for the first time from the RBI governor’s role as the sole arbiter. The MPC has six members, three from the RBI and three appointed by the central government. Each member of the MPC has one vote including the RBI governor and the decision is to be made by majority vote. In the recently concluded MPC meeting, all six members voted in favor of a rate cut.

Sales figures reported by most auto companies, including 2-wheel and 4-wheel vehicles, showed robust year-on-year volume growth. Rising auto sales in a low interest rate environment suggested discretionary consumption demand is picking up. Low inflation, rising discretionary demand, and implementation of 7th Pay commission all point towards impending pickup in consumption growth in the economy even though there has been no pick up in volume growth for consumer staple companies yet.  


In October, the Tokyo Stock Price Index returned 5.31% in local currency terms (up 1.53% in U.S. dollar terms). The sectors that outperformed include commodity futures, fishery, agriculture, forestry, and insurance. Meanwhile, the pharmaceuticals, services, and iron and steel sectors underperformed. The yen weakened by 3.79% versus the U.S. dollar.

Macroeconomic data were generally flat. In addition, the Bank of Japan Tankan Survey results for the third quarter were generally flat for large corporations. Sentiment for small businesses improved slightly, but remained in negative territory. Inflation continued to be muted, with the September consumer price index (CPI) at -0.5% (August -0.5%) and CPI excluding food and energy was unchanged year-on-year (YoY).

On the positive side, Japan’s labor conditions remain tight. The jobless rate for the month of September was at 3.0%, and the jobs-to-applicant ratio was 1.38—marking levels not seen since 1994 and 1991, respectively. In September, household income rose 2.7% YoY.

In terms of foreign investor inflows into Japan’s equity markets for the first three weeks of October, investors bought net 466 billion yen, after net selling of 6.19 trillion yen from January to September 2016.


During the month, the Korea Composite Stock Price Index (KOSPI) contracted -1.73% in local currency terms and -5.70% in U.S. dollar terms. The Korean won depreciated by 3.7% against the U.S. dollar due to growing expectation of a possible rate hike in the U.S. 

South Korea’s trade surplus rose to US$7.2 billion in October, as exports and imports declined 3.2% and 5.4%, respectively compared to a year ago. The two-month export decline since rebounding in August was mainly due to the new smartphone recall  and labor strikes at automakers. Still, certain product categories such as semiconductors and computers saw positive growth, with cosmetics and OLED’s continued double digit growth trajectory. 

National retail sales figures released for September grew 2.1% compared to a year ago, despite the lower sales of smartphone handsets due to recalls. Sales at online channels continued to show a strong 15.5%, outperforming the offline stores. Among offline channels, convenience stores showed solid growth of 16.2%, and department stores posted a well-rounded 3.7% growth.

The composite consumer sentiment index for October continued to improve to 101.9, according to the Bank of Korea—marking a 10-month high since December 2015. The consumer price index (CPI) rose 1.3% in October from a year earlier, its highest level since February 2016.

The Bank of Korea’s Monetary Policy Committee (MPC) unanimously voted to keep the policy rate at 1.25% in October for the fourth straight month since June. South Korea’s economic growth recovery is expected to continue, in part due to expansionary fiscal policy. Nonetheless, the MPC will continue to monitor the status of domestic household debt and corporate restructuring. Moreover, the CPI is expected to pick up as a temporary cut to residential electricity tariffs for the July to September period has ended, and oil prices may concurrently be rebounding. 

Southeast Asia 

In October, the MSCI South East Asia Index delivered a total return of -1.93% in U.S. dollar terms, as markets reacted to the increased probability of early rate hikes by the U.S. Federal Reserve. Indonesia’s Jakarta Composite Index returned 1.1% in local currency terms (up 1.04% in U.S. dollar terms as the rupiah strengthened against the dollar), as sentiment faltered on the weak initial response to the tax amnesty program. The Philippines’ Stock Exchange PSEi index returned -2.94% in local currency terms (-3.33% in U.S. dollar terms) on 25 consecutive days of net foreign outflows as investors took profits against a slow recovery in earnings. Meanwhile, Thailand’s SET index turned tables from the prior month’s loss with a total return of 0.88% in local currency terms (although -0.35% in U.S. dollar terms as the Thai baht weakened on foreign outflows).

The Thai King’s passing was a key event in Thailand in October. Local purchases vs foreign sales led to a vast divergence in performance of the broader SET index (-0.35%) versus the MSCI Thailand index (-2.52%) for the month. 

In the Philippines, concerns over the strategic alliance with the U.S. and the potential impact on the crucial business process outsourcing (BPO) sector led to further profit-taking by investors, despite impressive gains reaped from official presidential visits to China and Japan.

The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investments vehicles.