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Matthews Asia Country Updates

For the month ending December 2016

China/Hong Kong

In December, the MSCI China Index returned -4.13% and Hong Kong's Hang Seng Index returned -3.45%, both in local currency terms. China's domestic CSI300, the A share index, returned -6.44% in local currency terms (-7.02% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.95 against the U.S. dollar. The real effective exchange rate was down 6% year-to-date through the end of November, but was up by 46% from June 2005, when China began to reform its exchange rate mechanism.
In the first 11 months of 2016, new home sales, on a square meter-basis, rose 24.5% year-on-year (YoY), after rising 6.9% for all of 2015. This also compared to an increase of 7.9% a year ago. Online retail sales of goods rose 25.7% year-on-year through November.

In November, inflation-adjusted retail sales in China rose 9.2% YoY, compared to 11% a year ago and 11.2% in November 2014. Real retail sales were up 9.6% for the first 11 months of the year, compared to 10.6% during the same period a year ago and 10.8% two years ago. Passenger vehicle sales rose 17.2% YoY (including a 41.5% rise in SUV sales) and sales of decorating materials rose 11%.


The Indian market was volatile in December due to expectations of weak consumer demand following the country’s demonetization drive, as well as the Reserve Bank of India’s (RBI) decision to keep rates on hold. Meanwhile, expectations of populist measures and tax reforms lent some support to the market. The S&P Bombay Stock Exchange 100 Index returned -0.24% in U.S. dollar terms (-1.11% in local currency) led by declines in financials, health care, and the materials sectors.

The index of industrial production posted negative growth of -1.9% from 0.7% in the previous month, while the consumer price index was reported at 3.6%, down from 4.2%. The data suggested weaker demand was on the back of a shortage of cash and pointed to an immediate negative wealth effect from the demonetization campaign. Auto sales for the month of December, however, showed mixed results, with car sales down only 4% versus motorcycle sales that declined by 25%.

Contrary to widespread expectations, the RBI decided not to cut interest rates in December. It cited sustained strength in food prices, and volatility in crude prices as the risks to its inflation target. The RBI also suggested that the effects from the demonetization campaign were transitory and uncertain, and hence, were not incorporated in its monetary policy stance. The trade deficit reported in December was the highest seen in the last few quarters, and rising oil prices suggest a further deterioration is likely.  The central bank likely took a cautious approach in order to keep the currency stable.

The market recovered most of its early losses during the last week of December as Prime Minister Narendra Modi announced a slew of populist measures impacting housing loans, women, and senior citizens. In terms of sector performance, financials were weak on the back of expectations of weaker credit growth and excess liquidity negatively impacting margins. The health care sector also suffered, as several companies were found guilty of manufacturing non-compliance by the U.S. Food and Drug Administration.


In December, the Tokyo Stock Price Index advanced 3.35% in local currency terms (up 1.12% in U.S. dollar terms). Industries that outperformed included oil and coal products, security and commodity futures, and fish, agriculture and forestry sectors. Meanwhile, rubber products, and pulp and paper were among the industries that underperformed during the month. The yen weakened by 2.14% versus the U.S. dollar.
Macroeconomic data was generally mixed, with third quarter capital spending down -1.3% year-over-year, while consumer confidence for November came in at 40.9, somewhat stalling following the recent improvement. On the positive side, the Bank of Japan’s quarterly Tankan survey showed a +1 reading for business conditions among small enterprises in the manufacturing sector, the first positive reading since March 2015. Shoko Chukin Bank’s small business confidence survey showed continued improvement after seeing a trough in May of 2016. Japan’s job market remains tight, with the November jobs-to-applicant ratio at 1.41, its highest reading since June 1991. 
December continued to see foreign investor inflows into Japan’s markets; foreign investors poured 1.20 trillion yen into equities through cash and futures, following 3.57 trillion yen of net selling from January to November of 2016.


During the month, the Korea Composite Stock Price Index (KOSPI) advanced 2.17% in local currency terms and declined -0.29% in U.S. dollar terms. The Korean won depreciated by 2.5% against the U.S. dollar, in part due to the rate hike by the U.S. Federal Reserve and its signaling further interest rate increases are likely in 2017.

South Korea’s trade surplus stood at US$7.0 billion in December, as exports rose 6.4% and imports grew 7.3% from a year earlier. The rise in exports was driven by semiconductors, machinery, chemicals and display, offsetting a drop in ships. Also, cosmetics and organic light-emitting diodes (OLED) showed continued double-digit growth. The Ministry of Trade, Industry and Energy forecast Korean exports will expand 2.9% in 2017, compared to -5.9% in 2016, on the back of improving global demand and despite concerns over rising protectionism. 

National retail sales figures released for November grew 6.5% compared to a year ago. Convenience stores and online channels continued to show strong growth of 15% and 20%, respectively. Traditional brick-and-mortar stores posted muted growth of 0.3% overall, due to weak demand at department stores and hypermarkets. On a separate note, the Korea Tourism Organization (KTO) posted inbound traffic growth of 14% for November compared to a year ago. It was notable that Japanese inbound traffic continued its rebound since February, growing 29% in November year-over-year, after four years of decline.
The consumer price index (CPI) rose 1.3% in December from a year earlier. Inflation has been above 1% since September 2016, in part due to rising oil and agricultural goods prices. In the meantime, the composite consumer sentiment index for December hit its lowest level since 2009—94.2, compared to 95.8 in November, according to the Bank of Korea. 

The Bank of Korea’s Monetary Policy Committee unanimously voted to maintain its 1.25% policy rate in December for the seventh consecutive month. The central bank announced that it will maintain its easing stance in 2017 to support growth, given the expected fall in inflation pressures, but it will keep an eye on the U.S.’s rate hike path as well as global economic uncertainties.

Southeast Asia 

In December, the MSCI South East Asia Index edged into positive territory returning 1.11% in U.S. dollar terms, after weakness during the middle of the month as equity outflows gained pace. The Philippines’ Stock Exchange PSEi index returned 0.97% in local currency terms (and 1.40% in U.S. dollar terms). Indonesia’s Jakarta Composite Index (JCI) was the bright spot gaining 3.02% in local currency terms (and 3.42% in U.S. dollar terms) as commodities trended higher and uncertainty over tax policy abated. Meanwhile, Thailand’s SET index made positive ground in local currency terms, gaining 2.24%, (and in U.S. dollar terms gaining 1.84%), helped by continued government spending and an orderly royal succession. Malaysia’s KLCI index was up 1.63% and 1.17% in local currency and U.S. dollar terms, respectively. Singapore was the laggard in the region falling -0.60% in local currency terms (and -1.54% in U.S. dollar terms).
Malaysia implemented adjustments to its foreign exchange rules, which are set to be positive for the Malaysian ringgit (MYR). The new regulations are expected to boost the overall balance of payments outlook. Any increase in inflows will help to rebuild the central bank’s international reserves base (Malaysia has seen one of the sharpest falls in foreign exchange reserves within the region since the taper tantrum of 2013), allowing better coverage of short-term external debt and government security holdings. The MYR depreciated 0.7% and 10-year local currency bond yields fell to 4.16%.
During the month, Indonesia clarified treatment of tax amnesty participants, and another US$5.7 billion is expected to have entered Indonesia by year-end 2016. Indonesia’s equity, bond and currency markets were all higher in December. The 10-year local currency government bond yield fell by 28 basis points (0.28%) to 7.86%, and the Indonesian rupiah (IDR) strengthened by 0.1% to 13,476 against the U.S. dollar.

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.