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Matthews Asia Country Updates

For the month ending September 2014

China/Hong Kong

In September, the MSCI China Index returned -6.35%. Hong Kong's Hang Seng Index returned -6.9% (-7.07% in U.S. dollar terms) and China's domestic CSI300, the A share index returned 4.86% (4.92% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.17 against the U.S. dollar, down from 6.14 at the end of August.

During the month, China’s purchasing managers index (PMI) reading remained unchanged at 51.1 from last month and the HSBC flash PMI reading also stayed unchanged from September. The reading is above 50, the threshold for manufacturing expansion (a reading below 50 indicates a contraction).

Data for industrial production in August however pointed to weakness in China’s macroeconomic environment. Industrial production growth dropped to 6.9% from 9% in July. Fixed asset investment grew 16.5% in August versus 17% in July and retail sales growth further moderated to 11.9% from 12.2% in July.

Inflation in China remained tightly under control. The consumer price index stayed at 2.0%. In August, new bank loans increased to about US$114 billion, in response to some decline in economic activity.

Many local governments in China relaxed home purchase restrictions in September, but overall, the impact was not as obvious as expected due to a housing oversupply among some smaller cities. Toward the end of the month, the central bank issued a statement to loosen some home mortgage policies and that could help stimulate upgrade demand and help increase home-buying activity. 


During September, India’s market was somewhat flat amid moderate foreign equity inflows and some setbacks in infrastructure. The S&P Bombay Stock Exchange 100 Index gained 0.06% in local currency terms (-2.05% in U.S. dollar terms). Foreign institutional equity inflows were at US$1.07 billion, compared to $13.9 billion year-to-date. While the government is still battling to push major reforms, the Supreme Court cancelled many of the coal blocks that were awarded in the last two decades. This led to a correction in many of the infrastructure-driven stocks. However, this was partially mitigated by the performance of relatively secular growth sectors such as consumers and health care.

The macroeconomic data remained volatile and mixed. Inflation moderated to 7.8% in August from 7.96% in July and 8.59% in April, but that was still outside the central bank’s comfort zone, which is why it kept interest rates unchanged. The central bank appears to be clear on its stance on inflation. India’s current account deficit continued to improve, and has come down to 1.7% of GDP for the quarter ending June, compared to an all-time high of 6.7% in the last quarter of 2012. Industrial growth has been positive but volatile as it declined to 0.5% in July, compared to 3.4% in June and 5% in May.

The newly elected federal government has not yet been able to push through major reforms pertaining to land, labor, agriculture or taxation, but the prime minister has been able to strengthen trade and funding ties with wealthier nations such as Japan, China and the U.S. Meanwhile, rating agency Standard and Poor’s upgraded its outlook on India’s creditworthiness, taking a positive view on various efforts by the government and the impact of declining oil prices on India’s balance of payments situation. 


In September, the Tokyo Stock Price Index increased by 4.4% (-0.95% in U.S. dollar terms). At the sector level, information technology, utilities, consumer discretionary and industrials were the largest outperformers while energy, consumer staples and health care were the main underperformers. The yen weakened by 5.08% during the month.

Macroeconomic data for the month was largely negative. Industrial production dropped by 1.5% in August despite consensus expectations for an increase, and revised April-to-June real GDP figures showed a 7.1% contraction in output, following a 6% increase the previous quarter.

These figures will continue to be closely monitored amidst the mixed messaging ahead of December’s decision over whether to proceed with a second hike in consumption tax, from 8% to 10%, in October 2015.

On a more positive note, unemployment fell to 3.5%, its lowest level in 17 years. However, the consumer price index, excluding fresh food and energy, rose 2.3% in August, still below the Bank of Japan’s long-term target of 2% when adjusted for the impact of the April sales tax hike. 


During the month, the Korea Composite Stock Price Index declined -2.34% in local currency terms  (-6.27% in U.S. dollar terms), as the Korean won depreciated 4.08% against the U.S. dollar.


The sharp correction of the won is attributable to the Bank of Korea’s rate cut in August as well as an overall strong U.S. dollar. The currency had previously experienced strong performance since April on the back of strong current account surplus.


Trade data saw an estimated surplus of US$3.4 billion. Exports have continued solid growth backed by strong demand from the U.S. and a revival of demand from China. Before September, exports to China declined for four consecutive months compared to the previous year. By product, exports of steel and marine vessels were strong, while mobile communications devices saw a decline.


In September, the Bank of Korea held its policy rate steady at 2.25%. The consumer price index (CPI) for the month further slowed to 1.1%, well within the Bank of Korea’s comfort zone. Even excluding fresh foods and oil, the CPI remained low at 1.9%. 

Southeast Asia

In September, the MSCI South East Asia Index declined 2.94% in U.S. dollar terms. Notably, the Philippine’s PSE Composite Index (PCOMP) advanced 3.29% in local currency terms (0.21% in U.S. dollar terms) Malaysia’s FTSE Bursa Malaysia KLCI declined -1.06% in local currency terms (-4.64% in U.S. dollar terms). 

The Philippine Central Bank increased the overnight borrowing and lending rates by 25 basis points (0.25%), resulting in policy rates of 4.00% and 6.00% respectively. The hike was in response to inflation expectations for 2015 surpassing the upper end of the bank’s target range of 4%. Inflation hit 4.9% in August. The capital city of Manila lifted a truck ban that limited the number of hours trucks could operate in the city. The ban, which was intended to ease traffic congestion, had caused an accumulation of containers at the two major ports in Manila. The ban was cited as one of the reasons for the Asian Development Bank’s lower growth expectations of 6.2%, down from its previous estimate of 6.4%.

In Malaysia, a program intended to reduce subsidies provided by the state in stages, is ongoing. Petrol and diesel prices were increased 10%. Fuel subsidies are estimated to cost the government RM21 billion (US$6.45 billion) annually. Analysts estimated that a fuel price hike would help the government save about 0.35% of GDP annually. The government is planning for a targeted approach to its subsidy schemes, such as subsidy pricing and quotas on fuel, based on household income levels aimed at lower income groups. 

September 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.