Asia Pacific Macro – January 14, 2022

| January 14th, 2022

As forecasted yesterday, the Bank of Korea raised rates to 1.25%, out of inflation concerns. This is but one of the many pieces of news related to inflation, which will continue to be worrisome for some time to come. Other key topics are the delayed bond payment granted to Evergrande for an onshore bond, which averts further complications (for the time being) and a record-breaking trade surplus coming from China, which highlights the imbalance within its economy in a very delicate year for them.

  1. CENTRAL BANKS

1.1 South Korea eyes further rate increases after 2nd straight hike – Nikkei Asia

The Bank of Korea on Friday raised its key interest rate to 1.25% from 1%, a second-straight hike aimed at easing inflation pressure in Asia’s fourth-largest economy.

The increase — expected by 25 out of 35 economists in a Reuters poll — follows a 25 basis point rise in November. Inflation in South Korea hit a 10-year high last year, with its consumer price index rising 2.5%.

Gov. Lee Ju-yeol, who’s second four-year term ends in March, said that the central bank is considering at least another two increases this year.

“I don’t think 1.5% could be considered as tightening,” Lee said in a press briefing after the decision. “[We] raised it today, but I believe it’s still accommodative.”

Economists raised similar voices, expecting three more hikes may come this year.

“The Bank of Korea’s first back-to-back hike since 2007, in the face of downside risks from a global Omicron wave, is a clear sign of its commitment to tightening policy,” Alex Holmes, Asia economist at Capital Economics wrote in a note after the decision. “On the face of it, the risks are now weighted towards the Bank making more than the three 25bp rates hikes we originally had penciled in for this year.”

Also Friday, the government announced it will set a 14 trillion won (nearly $12 billion) supplementary budget to support small business owners suffering from strengthened social distancing rules. Finance Minister Hong Nam-ki said that the government will issue bonds to fund the budget.

Comment: Given that March will see both a new Chair for the BoK and the result of the elections, it would be prudent to wait until then before theorising about further rate hikes. By that time, the rest of the major Central Banks would have had another round of meetings and thus provide some clarity for what is to come.

In that vein, Japan is a case in point, with the BoJ debating messaging on an eventual rate hike as inflation is becoming of concern. To this end, it is considering conducting thorough analysis on the country’s price dynamics and whether recent signs of quickening inflation would be sustainable, said two sources familiar with its thinking, with a report coming for next week’s meeting.

This does not mean they will actually raise rates, as they have been ultra-loose in their policy, but the consideration alone is noteworthy. As shown already, manufacturers have been raising prices and inflation may pick up in the upcoming months, assuming more follow suit. With this said, the bond market has hit a higher yield as a result of these inflation worries, at levels not been seen since 2016,.

Meanwhile, India’s wholesale price inflation for December was released. While it has eased since November, it is still at a staggering 13.56%, the nine consecutive month in double digits. The main contributors are rising input costs such as fuel, metals and chemicals, ultimately caused by the high energy prices. The most concerning aspect is that the wholesale price of food accelerated, 6.70% versus the 3.06% of the previous month.

In line with what stated yesterday, the data on inflation may eventually force a response from the RBI, especially if core inflation remains too high. Even this is a concern for the RBI, as Governor Das said on November 10.

1.2 India grants financial assistance of over USD 900 million to Sri Lanka to overcome forex crisis – Financial Express

India has announced a USD 900 million loan to Sri Lanka to build up its depleted foreign reserves and for food imports, amidst a shortage of almost all essential commodities in the island nation. On Wednesday, the governor of the Central Bank Ajith Nivard Cabraal said that the island nation is negotiating a USD one billion loan from India to import goods from the country.

The Indian High Commissioner to Sri Lanka Gopal Baglay met Cabraal on Thursday and “expressed India’s strong support to Sri Lanka in the wake of RBI extending over USD 900 million facilities over the last week”.“These comprise deferment of Asian Clearing Union settlement of over USD 509 million and currency swap of USD 400 million,” the tweet said. Cabraal on Wednesday said that billion-dollar loan negotiations with India had reached its advanced stage.

Commenting on India’s gesture, analysts here said the Indian assistance could have contributed to Sri Lanka’s doubling of reserves announced at the end of December.The central bank said that the reserve position had doubled to USD 3 billion from being down to USD 1.5 billion by December or sufficient for just a month’s imports.Cabraal claimed that the forthcoming Indian loan would be for food imports.

Sri Lanka is currently experiencing a shortage of almost all essentials due to a shortage of dollars to pay for the imports.Additionally, power cuts are imposed at peak hours as the state power entity is unable to obtain fuel to run turbines. The state fuel entity has stopped oil supplies as the electricity board has large unpaid bills.The only refinery was shut as it was unable to pay dollars for crude imports.

2. ECONOMIC DATA

2.1 Chinese food giants hike prices as production costs rise – Nikkei Asia

Several Chinese food giants have announced an increase in the retail prices of their products, as rising production costs and a higher producer price index (PPI) erode profit margins.

Companies including Foshan Haitian Flavouring & Food, Jiangsu Hengshun Vinegar Industry and Chacha Food have raised their prices as much as 18% in the past month.

Vinegar producing giant Jiangsu Hengshun said Wednesday that some products will be priced between 5% and 15% higher, starting from Nov. 20, due to a “significant” increase in costs of raw inputs and freight transport.

“Higher retail prices may not result in better profits, because it also affects sales volumes, coupled with inflating production costs,” Jiangsu Hengshun added in its exchange filing.

At least three other food producers have released similar announcements just this week. Fresh food manufacturer Haixin Foods and seasoning producer Fu Jian Anjoy Foods announced an increase in retail prices of between 3% and 10%, as well as lower discount rates during promotions. Yeast producing giant Angel Yeast also issued a notice on Monday to disclose higher retail prices, just over a month after it hiked prices for the first time in late September.

Comment: As stated previously, China has been having quite a large gap between PPI and CPI. News like this will boost the latter at a key junction for the Chinese economy, as Lunar Year is approaching. The question is whether more companies will follow suit and, if so, what the authorities will do about it.

3. REAL ESTATE

3.1 China Evergrande shares climb after winning bond payment delay – Reuters

Shares of China Evergrande Group (3333.HK) edged up on Friday after the world’s most indebted developer secured a crucial approval from onshore bondholders to delay payments on one of its bonds as more developers race to avert defaults. read more

Struggling with $300 billion in liabilities, including $19 billion in international bonds deemed to be in cross-default after missing a payment deadline last month, Evergrande is working to avoid a technical default onshore that would complicate its politically sensitive restructuring.

The firm reached an agreement with bondholders on Thursday to delay redemption and coupon payments for a 4.5 billion yuan ($707.52 million) bond which were due on Jan. 8 by six months.

“The approval was expected; bondholders would not want to break up with Evergrande now because they hope the problem could be resolved eventually,” said Kington Lin, managing director of Asset Management Department at Canfield Securities Limited.

Comment: Such news once again shows that offshore and onshore bonds are treated differently, as even though Evergrande has not paid offshore bonds, it has not forced a default on the onshore ones. It is debatable whether it will find the liquidity required to repay these loans, as the amount coming due this year is substantial (in total about $7.4 billion).

Another factor making the repayment unlikely is the slump in sales which has been going on in China for quite some time. The following chart shows the property transaction volume from 2019, before the pandemic, until now.

Sales are already considerably below 2021, at a crucial time as the market drops substantially for the Lunar Year. There have been attempts to revive it, like cases of local governments providing vouchers and tax cuts for both home buyers and top-selling developers,  but the whole system is severely compromised at this point. The effects would impact other areas as well, as we will see in a following article regarding iron ore.

4. ENERGY/COMMODITIES

4.1 Iron ore’s $US100-plus days are numbered – AFR

The swift and unexpected rally in iron ore prices could be approaching its peak, strategists warn, as seasonal supply concerns caused by La Niña unwind and markets determine how China will balance its desire to stimulate growth with plans to reduce emissions.

The price of Australia’s number one export reached $US131.60 a tonne in the spot market this week, according to S&P Global Platts, signifying a 50 per cent jump from the lows reached in November and the highest level since October. Prices eased on Thursday to $US127.95 a tonne.

The price of the bulk commodity has been boosted over the past two months by signs of improving steel output in China and the expectation of more stimulus to fuel growth in the world’s second largest economy.

But the rally intensified this week as heavy rain in south-east Brazil, which has been linked to the La Niña climate event, forced the world’s second largest producer, Vale, and other local producers to halt operations. The overnight fall in prices reflected reports of easing weather conditions in the major ore-producing regions, according to NAB.

While markets have moved to factor in the seasonal disruption to supply and a move to more aggressive stimulus in China following the Beijing Winter Olympics, some strategists are convinced prices are unsustainable hereafter.

Comment: Aside from what happened in Brazil, which will eventually be able to go back to normal after the weather situation clears out, iron is priced under the assumption that China will do more stimulus. Such an expectation may be optimistic, however.

As we saw in previous issues, there are several structural problems in China which directly impact iron prices, all connected to one another:

  • Private property developers have been hit very hard, with several either having gone bankrupt or in financial distress
  • Local governments started relying on their own finance vehicles for land sales, although revenues have taken a hit
  • Banks started tightening lending, fearing the risk of bad loans (also because loans to the property sector account 27% of total lending, according to official data)

As the property sector is a key one as far as the demand for steel, and subsequently iron, is concerned, stimulus alone will not compensate for the demand crunch that has come and will persist. The only reasonable scenario for iron to stay up is a massive building spree for affordable housing in China, financed directly by the central government. There is however little to no indication regarding such a plan being actually considered, even though it would fit the ‘common prosperity’ theme of theirs.

4.2 Alarm bells for jumpy gas market – AFR

Wood Mackenzie is warning of “another bumpy year ahead” for global gas amid political ructions over soaring energy prices in Europe, investor pressures around investment in new supply and intense questioning of the fuel’s role in the decarbonising world.

Worldwide gas demand is expected to remain “resilient” in the short term, but high prices are likely to put pressure on demand and the rationale for switching from coal to gas in Asia will diminish, the consultancy’s vice president Massimo Di Odoardo said in a gas and LNG outlook on Thursday.

“Meanwhile, investment in renewables and batteries will increase, limiting the headroom for gas demand to grow,” he said.

“And in Europe, where the move towards renewables is already underway, policymakers will look to accelerate the shift away from natural gas, as the recent EU proposal to support biomethane and hydrogen suggests.”

Comment: The energy market has been disrupted quite heavily during the pandemic, both because of supply chain disruption and because of political agendas at play. With this said, gas is more likely to enjoy strong demand over the long run, as there is no easy replacement:

  • Renewables are an intermittent source of energy, whose energy production is susceptible to weather conditions (like lack of wind as example). As such, they require a backup of some sort
  • Batteries are still in their infancy and would need some drastic scaling up before being considered as a reliable backup (assuming such a scaling up is even realistic, as in terms of raw resources alone it would spike the demand for several key commodities). Until that happens (assuming if that happens at all) gas is the most reliable backup
  • Biomethane is, for all intents and purposes, the same thing but from a different source (and even then it would require some drastic scaling up)
  • Hydrogen is complicated, as it entirely depends on the source. The chemically simplest source of hydrogen is methane or other small hydrocarbons, which make up natural gas

Energy has been the building block of human civilization, ever since our ancestors mastered how to light fires, and for this very reason should be treated with extreme care. Sadly, the discussion has become more often than not more ideological/emotional than practical, which is ineffective at best and damaging at worst.

4.3 Indonesia to amend local coal supply rules to improve compliance – Nikkei Asia

The Indonesian government is drawing up plans to revise its domestic coal policy in the hope of encouraging compliance from miners and reducing the likelihood of coal shortages in the future.

Arifin Tasrif, Minister of Energy and Mineral Resources, laid out the potential changes in a parliamentary hearing on Thursday. The new plan will allow state-owned utility Perusahaan Listrik Negara to buy locally mined coal at the market price rather than at the level set by the government under the domestic market obligation policy.

The price of domestic coal is capped at $70 per ton under current DMO rules, which also state that miners must supply 25% of annual production to the local market. This is below half the market price. Many miners, in particular the medium and small producers, have been flouting the rule to sell overseas for higher profits.

Under the new scheme, levies will be collected from coal miners to subsidize the difference between the DMO price and the market price PLN will pay.

The government will set up a public service agency to manage the collected levies, Tasrif said. Such agencies manage businesses considered to be socially important like hospitals and universities without focusing on profit.

Comment: The scheme seems rather ineffective: the goal is to collect levies from exports to pay the difference between the DMO and the market price, which will most likely factor in the levy. Then again, this whole situation shows what happens when policymakers meddle in energy with quotas and/or price controls (as they managed to create a coal shortage in the largest producer of thermal coal).

4.4 China’s annual crude oil imports drop for first time in 20 years – Reuters

China’s annual crude oil imports slid 5.4% in 2021, dropping for the first time since 2001, as Beijing clamped down on the refining sector to curb excess domestic fuel production while refiners drew down massive inventories.

China has been the global oil demand driver for the last decade, accounting for 44% of worldwide growth in oil imports since 2015, when Beijing started issuing import quotas to independent refiners. Benchmark Brent crude oil weakened slightly to $84.40 per barrel in the wake of the data release.

The fall in shipments into the world’s top crude importer, to 512.98 million tonnes (equivalent to 10.26 million barrels per day) from 2020’s 542.39 million tonnes, was shown in data from the General Administration of Chinese Customs on Friday.

Reuters last year reported slowing imports into the world’s No. 2 refiner as Beijing scrutinised tax evasion and irregular quota trading among independent refineries and also cut fuel export quotas to restrain crude processing.

Comment: 2021 was overall quite hectic for energy in general and oil in particular. The price of oil picked up quite considerably and that may have been one of the factors in play for this, although it is hardly the only one.

Speaking of price, China will release crude oil from its national strategic stockpiles around the Lunar New Year holidays that start on Feb. 1 as part of a plan coordinated by the United States with other major consumers to reduce global prices, sources told Reuters.

The sources, who have knowledge of talks between the world’s top two crude consumers, said China agreed in late 2021 to release an unspecified amount of oil depending on price levels. “China agreed to release a relatively bigger amount if oil is above $85 a barrel, and a smaller volume if oil stays near the $75 level,” said one source, without elaborating.

Clearly, the intention is to reduce prices, energy being one of the largest contributors to inflation. With this said, it is difficult to precisely evaluate whether or not it would be successful given the lack of details, notwithstanding the questionable track record in US-Sino cooperation.

4.5 Malaysia to go on ‘attack’ to counter palm oil critics: minister – Nikkei Asia

Malaysia plans to adopt an “attacking and aggressive” approach to marketing its palm oil, the country’s commodities minister said Thursday, as the world’s most consumed edible oil comes under increased scrutiny and criticism in the West.

Zuraida Kamaruddin, who oversees Malaysia’s plantation industries and commodities, told reporters a more assertive communications plan is needed to play up the positives of palm oil and push back against pressure groups in the U.S. and Europe, while targeting new markets.

“All the benefits are proven by various scientists, but not publicized enough,” she said in Malaysia’s administrative capital of Putrajaya, without citing specific studies. “Some politicians in the [European Union] are still uninformed and choose not to be informed. We have to look at unconventional ways to promote palm oil.”

Palm oil is a key ingredient in a wide range of products, from food to cosmetics, but has long been controversial. Environmentalists say it drives deforestation, with huge swathes of rainforest cleared in past decades to make way for plantations. Europe has taken a particularly hard line, moving to phase out palm oil from biofuels and proposing a ban on imports of products linked to forest loss.

Use of palm oil in food and cosmetics has been declining in Europe, partly due to pressure on corporations from green groups. Supermarkets and wellness stores have begun labeling palm oil-based products, which producers say is discriminatory.

5. TECH

5.1 Jack Ma’s Ant faces restructuring obstacle as state investor withdraws – FT

Jack Ma’s Ant Group has suffered a setback to its government-led restructuring efforts after a state-owned asset manager unexpectedly pulled out of a deal to invest in the fintech’s lending arm.

China Cinda Asset Management, controlled by the country’s finance ministry, was set to invest Rmb6bn ($946m) in exchange for 20 per cent of Ant’s loans business, but said late on Thursday that it was withdrawing from the deal after “prudent commercial consideration and negotiation with the Target Company”.

Ant, which is controlled by the billionaire tech entrepreneur Ma, has been restructuring its business since Chinese regulators pulled the plug on its blockbuster $37bn initial public offering just days before it was set to debut in November 2020.

Ma has largely disappeared from public view as Ant and his ecommerce group Alibaba have come under severe government pressure. Financial authorities have focused on shrinking Ant’s business and limiting financial risk as part of a “rectification” campaign for the fintech company, which was China’s largest issuer of consumer credit.

The rectification plan includes winding down Ant’s biggest self-run fund and forcing it to spin off two of its most prized businesses into new companies, which have in turn accepted state-owned shareholders.

Comment: This news follows the theme of ‘disorderly expansion of capital’. While it is not plainly stated, the actual reason for this is most likely the fact that the investment focus is elsewhere and China Cinda Asset Management, being directly controlled by the finance ministry, has to oblige.

The ‘rectification plan’ is also an interesting topic to look at, as it translates into actual state control of key areas of the Ant Group’s business. After all, who is more qualified to bring order than the one deciding what that order is in the first place.

6. TRADE/SUPPLY CHAINS

6.1 ‘The entire food chain is out of whack’ – AFR

Supermarkets are once again restricting purchases of toilet paper as well as painkillers, mince, sausages and chicken as the supply chain crunch worsens, but independent food markets say they remain stacked full.

Woolworths brought back more shopping limits on Thursday, saying customers nationally could only buy two packs of toilet paper or painkillers, as it warned of ongoing supply chain constraints and increased demand.

In Western Australia, shoppers will also only be able to buy two packs of mince, sausages and chicken due to “excessive buying,” the supermarket chain said.

Coles is limiting toilet paper to one pack per customer and also restricting meat purchases around the country.

But Stan Liacos, chief executive of Melbourne’s historic Queen Victoria Market, which has been operating near the city centre for more than 140 years, said traders had been able to keep securing fresh produce because they weren’t locked into long-term supply or transportation contracts.

Comment: Having heard the war time stories regarding rationing, hearing about this is rather surreal. Then again, while this is no WWII, supply chains have been disrupted enough to cause all this, even two years after the start of the pandemic.

6.2 China trade surplus reached record in 2021 despite trade war – Nikkei Asia

China’s trade surplus in 2021 reached $676.4 billion, the largest ever and up about 30% from the previous year, the country’s General Administration of Customs said on Friday.

The second-largest global economy’s previous record was set in 2015. With demand for Chinese personal computers and toys recovering in major markets such as the U.S. and Europe, total exports increased by 29.9% to $3.36 tillion.

China also saw the first expansion in total imports in the last three years, which increased by 30.1% to $2.68 trillion.

Despite a trade war with Washington and its allies, vaccination drives in the U.S. and Europe helped consumer spending recover, which resulted in boosts for Chinese exporters.

Trade was also helped by disruptions in supply chains among members of the Association of Southeast Asian Nations, the economic bloc competing with China, where COVID-19 hit hard last year.

Comment: What is arguably more interesting to analyse here is what the trade surplus represents for China, rather than its implications with the rest of the world. While the trade off is indeed massive, there is something more to thi,s as Pettis stated in this thread.

Trade surplus is not to be looked at in isolation, but together with all the other contributors for the Chinese economy: as household income is still lagging, and subsequently consumption, the only possible outcome is a boost in trade surplus. The issue will become even more complicated, as the property sector woes (coupled with Covid-related restrictions) may further depress consumption and boost savings, which have to be compensated by even more trade surpluses. The cycle can only be interrupted if Beijing is serious about demand-side solutions but, as of now, this does not seem to be the case (also because consumption does not fit in their neat system of quotas and the like).

At the same time, India also reported data regarding its trade balance, but the picture is very much different. The country’s exports in December 2021 surged 38.91 per cent on an annual basis to USD 37.81 billion due to healthy performance by sectors such as engineering, textiles and chemicals, even as the trade deficit widened to USD 21.68 billion during the month, government data showed on Friday. Imports in December 2021 too increased 38.55 per cent to USD 59.48 billion. During April-December 2021-22, exports rose 49.66 per cent to USD 301.38 billion.

Imports during the period surged 68.91 per cent to USD 443.82 billion, leaving a trade deficit of USD 142.44 billion, the data showed. “Merchandise exports in December 2021 were USD 37.81 billion, as compared to USD 27.22 billion in December 2020, exhibiting a positive growth of 38.91 per cent. As compared to December 2019, exports in December 2021 exhibited a positive growth of 39.47 per cent,” the commerce ministry said in a statement.

Speaking of India, FTA negotiations between India and the UK were formally launched on January 13. Such a deal is expected to help double bilateral trade to over $100 billion by 2030 and boost economic ties between the two countries. The two sides are hoping to conclude negotiations by the end of 2022, with an interim agreement by Easter.