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Matthews Asia Country Updates

For the month ending July 2016

China/Hong Kong

In July, the MSCI China Index returned 3.52%. Hong Kong's Hang Seng Index returned 5.34% (5.34% in U.S. dollar terms) and China's domestic CSI300, the A share index, returned 2.62% (2.86% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.64 against the U.S. dollar. The real effective exchange rate was down 5% year-to-date through the end of June, but was up by 47% from June 2005, when China began to reform its exchange rate mechanism. 

In the first half of 2016, new home sales, on a square meter-basis, rose 28.6% year-on-year, after rising 6.9% for all of 2015, and compared to an increase of 4.5% a year ago. Online retail sales of goods rose 26.6% year-on-year through June.

First half macroeconomic data supports our view that China is in the midst of a successful transition from a high-speed, heavy industry-based economy to a consumer and services-based economy, which while decelerating, will remain the most important driver of global growth. The challenges of continuing this transition will result in gradually slower growth rates and increased volatility. However, the risks of a hard landing remain very low.


Indian markets were higher in the month of July 2016 amid expectations that its Upper House of Parliament would clear a sweeping Goods and Services Tax (GST). The S&P Bombay Stock Exchange 100 Index returned 6.19% in U.S. dollars (5.05% in local currency terms), driven by gains in the financials, consumer discretionary, materials, and energy sectors.

The Modi government appeared to be frantic in its efforts to advance the Good and Services Tax (GST) bill during the current session. Two key changes to the bill—the removal of a 1% additional tax levy by manufacturing states, and the introduction of a guarantee of 100% compensation to states for five years to make good on any revenue loss incurred by states due to the GST. With these two changes, the government is hoping to get support from regional parties for passage of the bill. 

The southwest monsoon was fairly strong in the month of July, which also helped markets. Cumulative rainfall recorded during the season thus far has been near long-term averages, implying that rainfall in July wiped out the 12% deficit recorded in June. Most recent forecasts suggest above-normal rainfall in August and September, and a strong monsoon bodes well for agriculture sector growth, which in turn should keep food inflation low. 

Following Reserve Bank of India (RBI) Governor Raghuram Rajan’s announcement of his impending departure from the post, there have been widespread expectations that the RBI would pivot toward looser monetary policy going forward. Rajan was in favor of keeping real interest rates in the region of 150 to 200 basis points, but it is likely that a new incoming central bank governor could dilute the real interest rate requirement and pave way for lower interest rates over the short to medium term.


In July, the Tokyo Stock Price Index increased by 6.18% in local currency terms (7.05% in U.S. dollar terms). Consumer discretionary, materials and financials were the best performing sectors during the month while energy, telecommunications and consumer staples underperformed. The yen strengthened by 1.11% versus the U.S. dollar.
On the macroeconomic front, data released during the month was weak with household spending down 2.2% and industrial output down 1.9% in June despite unemployment falling to its lowest level in over 20 years to 3.1%.

On the political front, the ruling coalition secured a majority in the Upper House elections in what many view as an endorsement for Prime Minister Shinzo Abe’s economic vision. While the Bank of Japan disappointed the market with a minor tweak in its own monetary policy off the back of this news, Abe did announce a 28 trillion yen fiscal stimulus package with further details to follow.

Despite these developments, the consumer price index, excluding fresh food and energy, remains weak with June growth of only 0.4%. In light of this, media commentary suggests an increasing appetite and expectation for so-called “helicopter money” to be utilized as another tool to spur inflation. 

South Korea

During the month, the Korea Composite Stock Price Index (KOSPI) returned 2.33% in local currency terms and 5.89% in U.S. dollar terms. The Korean won appreciated 2.82% against the U.S. dollar.

South Korea’s trade surplus rose to US$7.8 billion in July, as imports fell 14.0% year-over-year while exports declined 10.2%. Export volumes declined by 1.6% compared to a year ago.

In July, the Korean government announced an 11 trillion won supplementary budget (nearly US$10 billion) to fend off the negative impact from the slowing global economy and also to fund restructuring efforts in troubled industries, including shipbuilding and shipping. Most of the budget is to be funded by the excess tax revenue expected this year. The Bank of Korea’s Monetary Policy Committee is comfortable with the steady growth in the country’s domestic consumption in part due to an expansionary fiscal policy as well as the prior month’s rate cut. The committee, however, expressed the need to be cautious of a strong property market and credit growth amid this low-rate environment that is also seeing sluggish export growth.

Southeast Asia

In July, the MSCI South East Asia Index returned 2.47% in U.S. dollar terms. Notably, Philippines’ Stock Exchange PSEi index returned 2.15% in local currency terms (2.31% in U.S. dollar terms) as it neared an all-time high, and Indonesia’s Jakarta Composite Index rose 4.01% in local currency terms (4.79% in U.S. dollar terms). Meanwhile, Thailand’s SET index was the sub-region’s top performer, gaining 5.54% in local currency terms (6.59% in U.S. dollar terms).

In Indonesia, President Jokowi reshuffled 40% of his cabinet as part of a move to accommodate two more political parties. Among the changes, World Bank Managing Director Sri Mulyani Indrawati was re-appointed as Finance Minister. With the reshuffle, President Jokowi’s coalition commands a formidable 80% of seats in the House. On the economy, the trade balance printed its 6th consecutive surplus at US$900m in June, underpinning a more stable Indonesian rupiah.

In the Philippines, a United Nations-backed tribunal ruled in favor of the Philippines in its South China Sea maritime dispute with China. At his first State of the Nation Address, President Rodrigo Duterte highlighted plans to ease traffic congestion in Manila, accelerate infrastructure building, cut bureaucratic red tape, and institute comprehensive tax reforms. 

July 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.