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Matthews Asia Country Updates

For the month ending July 2014

China/Hong Kong

In July, the MSCI China Index increased 8.11%, Hong Kong's Hang Seng Index returned 7.27% (7.28% in U.S. dollar terms) and China's domestic CSI300 A share index returned 9.81% (10.34% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.17 against the U.S. dollar.

Also during the month, China’s Purchasing Managers Index (PMI) readings saw further improvement. The official PMI rose to 51.7 in July from 51 in June and the HSBC flash PMI reading increased to 51.7 in July from 50.7 in June. This is significant because a PMI above 50 indicates manufacturing expansion, whereas a reading below 50 indicates a contraction.

June’s activity data continued to signal an improving macroeconomic environment. Industrial production grew 9.2% in June compared to 8.8% in May. Fixed asset investment grew 17.3% in June versus 17.2% in May and retail sales moderated slightly at 12.4% in June versus 12.5% for May.

Inflation in China remained in check in June. The consumer price index dropped to 2.3% from 2.5% in May. In June, new bank loans increased to about US$180 billion, which signaled better financing support from the government toward the economy.

Given the slower rate of China’s property sales, many local governments have started to loosen so-called home purchase restrictions, and banks also appear to be more accommodating to first-time home buyers seeking mortgage loans. We have also witnessed further progress in China’s anti-corruption measures, and this could pave the way for further structural reforms.


The S&P Bombay Stock Exchange 100 Index was somewhat flat in July, with local currency returns at 1.11% (-0.23%) in U.S. dollar terms). Foreign institutional equity inflows were strong, totaling US$1.94 billion for the month and $11.86 billion year-to-date.

In July, India’s macroeconomic fundamentals improved on the margin. The most recent industrial production data revealed 4.7% year-over-year growth in May versus 3.4% in April. For the month of June, the core sector output—data focusing on infrastructure industries such as coal and electricity—also grew at its fastest pace in nine months. Exports and car sales also grew by double digits for the year-over-year period in June. The outlook on India’s agriculture has also improved as rainfall has improved since earlier this year. Inflation has also settled at 7.31% for June, down from 8.28% in May and much better than the near-double digit rate at the end of last calendar year.

However, corporate earnings results have been mixed so far, and a moderation in growth is quite evident across sectors. The banking sector (especially segments owned by the state) continues to see high credit costs. And little improvement has been observed in infrastructure-related businesses thus far.

India’s newly elected government presented its maiden budget for the next nine months. It appears intent to make slow and steady reforms without doing away with the popular programs of the erstwhile regime. Fiscal deficit targets appeared to be a bit ambitious and might require considerable growth on tax revenues amid a recovering economy. At the same time, the government proposed a further opening of the defense and insurance sectors to foreign investors.


In July, the Tokyo Stock Price Index rose 2.13% (0.58% is U.S. dollar terms). On a sector basis, information technology, materials and industrials were the largest outperformers while financials, utilities and energy were the main underperformers. The yen weakened by 1.45% during the month.

Macroeconomic data released during the month was largely negative. Unemployment rose unexpectedly to 3.7% while industrial production fell by 3.3% in June as consumer demand weakened. Retail sales levels continue to be observed with some scrutiny, following the sales tax hike in April and after lackluster growth of 0.4% in June fell below consensus expectations.

Inflation-related metrics were more positive with the job offers-to-applicants ratio reaching its highest level since 1992, indicating there are now 1.1 open positions per job seeker. This could enhance hopes for upward pressure in wages. The consumer price index, excluding fresh food and energy, also showed a year-on-year increase of 2.3%.


During the month, the Korea Composite Stock Price Index advanced 3.69% in local currency terms while it rose 1.64% in the U.S. dollar terms. The Korean won depreciated 1.58% against the U.S. dollar.


During the month, the Bank of Korea held its policy rate steady at 2.5%. The consumer price index for the month slowed to 1.6%, from 1.7% of the previous month. Trade data saw an estimated surplus of US$2.5 billion. Exports have continued to grow solidly, backed by improving economic conditions in developed markets. The government, however, has shown concerns over declining exports to China in recent months. Also notable during the month was the pace of import growth, the fastest so far this year. Raw materials accounted for 61% of the country's total imports, with higher crude oil prices and petrochemical feedstock, specifically, leading import growth.


During the month, President Park Geun Hye appointed five ministers, including Choi Kyung Hwan, who now holds the double post of vice prime minister and minister of strategy and finance. During his inauguration, Choi, who is responsible for the economic revitalization agenda, emphasized the urgent need to stimulate the economy, boost private consumption and improve quality of life. The financial market is reacting on expectations of more expansionary fiscal policy. The stock market responded favorably following Minister Choi's remarks about incentivizing companies to increase dividend payouts and boost wages. He noted that the excessive cash accumulation of Korean companies has not translated into more household wealth—an obstacle to achieving a healthier economy. The lower dividend yields of the Korean market has arguably been a primary reason for its lower valuation compared to global markets. 

Southeast Asia

In July, the MSCI South East Asia Index advanced 3.14% in U.S. dollar terms. Notably, Indonesia’s Jakarta Stock Exchange Composite Index advanced 4.31% in local currency terms (6.80% in U.S. dollar terms) and the Philippine Composite Index advanced 0.30% in local currency terms (0.01% in U.S. dollar terms). 

Indonesia elected Jakarta Governor Joko Widodo as president in a closely fought election. “Jokowi,” as he is popularly known, won more than 53% of total votes cast to become the nation’s the third directly elected president. Viewed as a reform candidate, the new president has pledged to improve infrastructure, stamp out corruption and reduce subsidies. His rival Prabowo Subianto, however, refused to accept results, and is challenging the election outcome in constitutional court. In other Indonesian news, Finance Minister Chatib Basri explained that GDP growth in the range of 5.3% to 5.5% for the second quarter was an improvement from the 5.21% growth at the end of the first quarter.

In the Philippines, there continued to be ongoing commotion related to President Benigno Aquino’s administration. The Supreme Court unanimously ruled the president’s stimulus program, the Disbursement Acceleration Programme, to be unconstitutional. The central bank hiked its main overnight rate by 25 basis points (0.25%) to 3.75%, the first rate hike since it dropped policy rates to 3.5% in October 2012. The move was a preemptive response to signs of inflation pressures and elevated inflation expectations, which the bank forecasts to be in the higher end of its target range of 2% to 4% for 2015. 

July 2014

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.