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Matthews Asia Country Updates

For the month ending September 2016

China/Hong Kong

In September, the MSCI China Index returned 2.54% and Hong Kong's Hang Seng Index returned 1.82%, both in local currency terms. China's domestic CSI300, the A share index, returned -2.15% in local currency terms (-1.92% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.67 RMB against the U.S. dollar. The real effective exchange rate was down 7% year-to-date through the end of August, but was up by 45% from June 2005, when China began to reform its exchange rate mechanism.
In the first eight months of 2016, new home sales, on a square meter-basis, rose 25.6% year-on-year, after rising 6.9% for all of 2015, and compared to an increase of 8% a year ago. Online retail sales of goods rose 25.5% year-on-year through August.

In August, inflation-adjusted retail sales in China rose 10.2% year-over-year, compared to 10.4% a year ago and 10.6% in August 2014. Real retail sales were up 9.8% for the first eight months of the year, compared to 10.5% during the same period a year ago and 10.7% two years ago. The August numbers benefited from strong sales of some housing-related goods. Passenger vehicle sales rose 26% YoY (including a 43.9% rise in SUV sales) and sales of decorating materials rose 16.3%.


Indian markets were lower in September amid rising political tensions between India and Pakistan, lack of monsoon rainfall and slowing consumption demand. The S&P Bombay Stock Exchange 100 Index returned -1.28% in U.S. dollars (-1.75% in local currency) led by losses in Financials, consumer staples, and Industrials.

In September, India conducted surgical strikes on Pakistan in retaliation for terrorist attacks on Indian army bases. The adoption of such aggressive tactics by the Indian government, in dealing with Pakistan, heightened risk perception of domestic and foreign investors.

Monsoons weakened considerably in the latter half of the season. Monsoons were tracking 1% above average at the end of July, but the season ended with cumulative rainfall 3% below average. While cumulative rainfall was within the normal range, it was short of investor expectations.

Consumption growth continues to be challenged despite the government’s implementation of its seventh Pay Commission, falling inflation, and a lower cost of capital. Rural India continues to be negatively impacted by two previous years of deficient rainfall and by inadequate momentum in infrastructure investments. 

Markets were also lower likely due to disappointing earnings growth. Based on reported results, earnings for the S&P Bombay Stock Exchange 100 Index declined over the first half this year compared to the previous year. This is in sharp contrast to analyst expectations of 30% growth.


In September, the Tokyo Stock Price Index declined by -0.51% in local currency terms (up 1.55% in U.S. dollar terms). The sectors that outperformed included oil and coal, fisheries, and agriculture and forestry while transportation equipment, insurance, and iron and steel underperformed. The yen strengthened by 2.10% versus the U.S. dollar.
Macroeconomic data was generally weak. Consumption remained muted, with consumption expenditures for the month of August shrinking -4.6% year-over-year (YoY) for five consecutive months of negative growth. The consumer price index (CPI) for August was also -0.5% YoY, which has remained in negative territory over seven out of eight months year-to-date this year. Core CPI is barely holding its positive territory, up 0.20% YoY for August. Despite the Bank of Japan's (BOJ) efforts to address its deflationary environment, the situation has persisted. 
On the positive side, Japan’s employment market remains tight. August job seekers ratio recorded its highest level seen since the early 1990s. The country’s August unemployment rate was 3.1%, the lowest level since 1995. These led to positive wage growth, with real wages for August posting 1.5% growth YoY. 
The BOJ maintained its negative policy and monetary base target pace, but tweaked its monetary policy and introduced an interest-rate target for 10-year government bonds, committing to keeping them at about zero. The central bank also said it would continue quantitative easing until inflation exceeds 2%, thereby pushing back the date for the target.

South Korea

During the month, the Korea Composite Stock Price Index (KOSPI) returned 0.44% in local currency terms and 1.73% in U.S. dollar terms. The Korean won appreciated by 1.3% against the U.S. dollar. The currency sharply depreciated after North Korea tested a nuclear warhead but recovered after Standard and Poor’s raised the country’s sovereign currency rating. 

South Korea’s trade surplus rose to US$7.1 billion in September as exports and imports declined 5.9% and 2.3%, respectively, compared to a year ago. The decline in exports in September, following a strong August, was attributable to the recalls of new smartphones and labor strikes at automakers. Still, certain product categories such as computers, auto parts, and displays continued to see a recovering trajectory, with cosmetics reporting record-high exports.

August retail sales figures were solid at 9.1% compared to a year ago, partly due to the earlier-than-usual Chuseok holidays (mid-autumn festival). Sales at online channels continued to show strong 20.2% growth, outperforming the offline stores which grew 4.6% year over year. Among offline channels, convenience stores showed strong growth at 16.1%, driven by new store openings and strong performance of fresh food categories. Sales growth at department stores was solid at 4.1%. 

Despite geopolitical tensions, Chinese tourist traffic into Korea remained strong in August growing 70% compared to a year ago albeit from a low base a year ago when the Middle Eastern Respiratory Syndrome outbreak hit Korea. 

The Bank of Korea’s Monetary Policy Committee (MPC) unanimously voted to keep the policy rate at 1.25% in September for the third straight month since June. The minutes released from the MPC meeting indicated that the recovery in economic growth would continue in Korea, supported by an expansionary fiscal policy. Nonetheless, the MPC indicated it will continue to monitor the status of domestic household debt and corporate restructurings.

Southeast Asia

In September, the MSCI South East Asia Index slipped -0.95% 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 fell -0.33% in local currency terms (up 1.76% in U.S. dollar terms as the rupiah strengthened against dollar), as sentiment faltered on the weak initial response to the tax amnesty program. The Philippines’ Stock Exchange PSEi index slumped -1.98% in local currency terms (-5.28% 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 lost the most ground, falling -3.97% in local currency terms (-3.9% in U.S. dollar terms).

In the Philippines, continued weak earnings momentum drove investor profit-taking, while the peso took the biggest monthly hit since October 2000, nudging the currency to a seven- year low. This occurred as concerns over the outlook for higher U.S. interest rates were coupled with President Duterte’s talk of a potential shift away from a longstanding alliance with the United States toward Beijing and Moscow.

Indonesia’s tax amnesty program had a slow start after its launch in July 2016, leading to weaker investor sentiment. But the JCI index rallied as asset declarations rose sharply from the middle of September to close the month at US$278 billion, 90% of the government’s target for the program which will end in March 2017.

September 2016

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.