Epsilon Capital Management’s First Quarter Asia Pacific (Emerging) Economic Round Up

This is Epsilon Capital Management’s 2 Part Series on the Emerging Asia Pacific Economies for the first quarter of In the first part of our report we will look across the region as a whole and more specifically at China and India. Emerging Asia Pacific: Economic Review 1st Quarter 2012 Emerging Asia Pacific witnesses a modest rebound despite oil spike Emerging Asia Pacific economies, which reported dismal economic numbers during the fourth quarter of 2011, recovered some lost ground during the first quarter of Export- led growth in many Asian countries such as Taiwan, Malaysia, South Korea, and China, which had come under pressure during the last months of 2011, witnessed slight improvements in 2012 thanks to receding fears about a sovereign debt crisis in the European Union and a stronger-than-expected recovery in the U.S. China, the region’s largest economy, however, signaled that it will accept a slightly lower growth rate of around 7.5% over the coming years. The Chinese economy grew at a pace of nearly 10% for over two decades. This is Epsilon Capital Management’s 2 Part Series on the Emerging Asia Pacific Economies for the first quarter of In the first part of our report we will look across the region as a whole and more specifically at China and India. Emerging Asia Pacific: Economic Review 1st Quarter 2012 Emerging Asia Pacific witnesses a modest rebound despite oil spike Emerging Asia Pacific economies, which reported dismal economic numbers during the fourth quarter of 2011, recovered some lost ground during the first quarter of Export- led growth in many Asian countries such as Taiwan, Malaysia, South Korea, and China, which had come under pressure during the last months of 2011, witnessed slight improvements in 2012 thanks to receding fears about a sovereign debt crisis in the European Union and a stronger-than-expected recovery in the U.S. China, the region’s largest economy, however, signaled that it will accept a slightly lower growth rate of around 7.5% over the coming years. The Chinese economy grew at a pace of nearly 10% for over two decades.

Inflationary pressures in the region also remained subdued in many of these economies in the face of slowing growth. However, there were significant signs that inflation could haunt emerging Asia Pacific economies sooner than later. A spike in oil prices during the first quarter of 2012 stirred inflation in many economies although the pace of inflation was not as high as witnessed during mid Consequently, although many countries experienced relatively low inflation, some central banks in the region stubbornly refused to cut interest rates. Central banks in Malaysia, India, and South Korea held on to their current levels of interest rates over fears of igniting inflationary pressures. On the other hand, central banks in Indonesia, Thailand, and Philippines were more comfortable cutting interest rates to stimulate growth. Inflationary pressures in the region also remained subdued in many of these economies in the face of slowing growth. However, there were significant signs that inflation could haunt emerging Asia Pacific economies sooner than later. A spike in oil prices during the first quarter of 2012 stirred inflation in many economies although the pace of inflation was not as high as witnessed during mid Consequently, although many countries experienced relatively low inflation, some central banks in the region stubbornly refused to cut interest rates. Central banks in Malaysia, India, and South Korea held on to their current levels of interest rates over fears of igniting inflationary pressures. On the other hand, central banks in Indonesia, Thailand, and Philippines were more comfortable cutting interest rates to stimulate growth.

China: Monetary tightening takes a toll on output China started calendar year 2012 on a sober note. Economic growth in the world’s second largest economy came under pressure from a stringent monetary policy, weakened exports, and subdued housing markets. Consequently, China had a forgettable January and February in 2012, recording the weakest production gain figures since During this period, the slowdown in the European Union, one of China’s largest export markets, hit many of the coastal factories that predominantly cater to overseas demand. As a result, Chinese exports slowed, forcing the country to record a $31.5 billion trade deficit in February. The February trade deficit was the first deficit in the past 12 months and the largest monthly deficit since The slowing export industry also pulled down industrial production growth to 11.4% for the first two months. Other economic indicators such as retail sales growth slowed to 14.7% in February against an expected 17.6% growth estimated by economists surveyed by Bloomberg. China: Monetary tightening takes a toll on output China started calendar year 2012 on a sober note. Economic growth in the world’s second largest economy came under pressure from a stringent monetary policy, weakened exports, and subdued housing markets. Consequently, China had a forgettable January and February in 2012, recording the weakest production gain figures since During this period, the slowdown in the European Union, one of China’s largest export markets, hit many of the coastal factories that predominantly cater to overseas demand. As a result, Chinese exports slowed, forcing the country to record a $31.5 billion trade deficit in February. The February trade deficit was the first deficit in the past 12 months and the largest monthly deficit since The slowing export industry also pulled down industrial production growth to 11.4% for the first two months. Other economic indicators such as retail sales growth slowed to 14.7% in February against an expected 17.6% growth estimated by economists surveyed by Bloomberg.

Nonetheless, Chinese rulers seemed to take the slowing growth in stride. In early March, Chinese Premier Wen Jiabao pared the nation’s targeted annual growth rate to 7.5% from the 8% annual growth target set in In 2011, China’s annual GDP growth rate touched 9.2% compared to 10.4% in China’s GDP growth rate slowed primarily due to a tight monetary policy that was introduced to combat stubbornly high inflation. China’s consumer price inflation, which had climbed as high as 6.5% in July 2011 slowed to an average of 5.4% for the whole year primarily due to monetary tightening. But the monetary tightening had other effects as well. China’s consumption-led growth became a victim to high interest rates. Sales of passenger cars, including both small cars and SUVs, declined 4.4% during the first two months of The industrial and manufacturing segment also witnessed a slowdown. For instance, the purchasing manager’s index (PMI) compiled by HSBC Holdings Plc, fell to 53.3 in March from 53.9 in February. Nonetheless, Chinese rulers seemed to take the slowing growth in stride. In early March, Chinese Premier Wen Jiabao pared the nation’s targeted annual growth rate to 7.5% from the 8% annual growth target set in In 2011, China’s annual GDP growth rate touched 9.2% compared to 10.4% in China’s GDP growth rate slowed primarily due to a tight monetary policy that was introduced to combat stubbornly high inflation. China’s consumer price inflation, which had climbed as high as 6.5% in July 2011 slowed to an average of 5.4% for the whole year primarily due to monetary tightening. But the monetary tightening had other effects as well. China’s consumption-led growth became a victim to high interest rates. Sales of passenger cars, including both small cars and SUVs, declined 4.4% during the first two months of The industrial and manufacturing segment also witnessed a slowdown. For instance, the purchasing manager’s index (PMI) compiled by HSBC Holdings Plc, fell to 53.3 in March from 53.9 in February.

On the other hand inflation, which was subdued, also gained pace in March. Consumer price inflation in China jumped 3.6% during the month. Although inflation during March was quite below China’s targeted inflation of 4%, food price inflation at 7.5% has caused concerns. Further, a sharp spike in oil prices earlier this year also forced Chinese authorities to keep a close watch on inflation numbers. Home prices in China, meanwhile, slipped down from their peak in Prices of new apartments fell in 45 of the 70 cities surveyed by the government in February. The fall in home prices come after a protracted battle from Chinese authorities to prevent a housing bubble in the country. Zhang Xiaoqiang, the vice chairman of National Development and Reform Commission, said that China’s first quarter GDP grew 8.4% citing preliminary research figures. On the other hand inflation, which was subdued, also gained pace in March. Consumer price inflation in China jumped 3.6% during the month. Although inflation during March was quite below China’s targeted inflation of 4%, food price inflation at 7.5% has caused concerns. Further, a sharp spike in oil prices earlier this year also forced Chinese authorities to keep a close watch on inflation numbers. Home prices in China, meanwhile, slipped down from their peak in Prices of new apartments fell in 45 of the 70 cities surveyed by the government in February. The fall in home prices come after a protracted battle from Chinese authorities to prevent a housing bubble in the country. Zhang Xiaoqiang, the vice chairman of National Development and Reform Commission, said that China’s first quarter GDP grew 8.4% citing preliminary research figures.

India: Slowing investment and persistent inflation cloud outlook India’s GDP for the three months ended December 2011 grew at 6.1%, the slowest pace in nearly eight quarters. The slowdown in GDP comes amidst the backdrop of high inflation, slowing investments, and faltering demand from developed markets. During this period, almost all legs of the economy encountered substantial challenges. While manufacturing output inched up just 0.4%, mining and farm output declined substantially. A large fiscal deficit arising from high social sector spending and a spike in oil prices has been troubling India over the past year. Private economists surveyed by Bloomberg estimate that India’s fiscal deficit will touch 6.1% of GDP for the year ending March On the other hand, the pace of investment is slowing in Asia’s third largest economy. The investment-to-GDP ratio in the December quarter fell to 30% from nearly 34% in the year-ago period. Gross fixed capital formation, which measures investments in roads and factories, declined 1.2% in the December 2011 quarter following a 4% fall in the previous quarter. India: Slowing investment and persistent inflation cloud outlook India’s GDP for the three months ended December 2011 grew at 6.1%, the slowest pace in nearly eight quarters. The slowdown in GDP comes amidst the backdrop of high inflation, slowing investments, and faltering demand from developed markets. During this period, almost all legs of the economy encountered substantial challenges. While manufacturing output inched up just 0.4%, mining and farm output declined substantially. A large fiscal deficit arising from high social sector spending and a spike in oil prices has been troubling India over the past year. Private economists surveyed by Bloomberg estimate that India’s fiscal deficit will touch 6.1% of GDP for the year ending March On the other hand, the pace of investment is slowing in Asia’s third largest economy. The investment-to-GDP ratio in the December quarter fell to 30% from nearly 34% in the year-ago period. Gross fixed capital formation, which measures investments in roads and factories, declined 1.2% in the December 2011 quarter following a 4% fall in the previous quarter.

India’s central bank, meanwhile, is watching the inflation numbers in order to trim borrowing costs to boost growth. The central bank had raised interest rates by nearly 375 basis points since March 2010 to combat inflation. During its policy meetings in 2012, the central bank refrained from cutting rates but chose to reduce the cash reserve ratio. India’s inflation, which trended down a bit in late 2011 again showed signs of rising in February, during which month it jumped 6.95%. In another note of weakness for India, the Purchasing Manager’s Index measured by HSBC, has consistently fallen over the past three months. After falling to 56.6 in February from 57.5 in January, the reading fell to a low of 54.7 in March. HSBC reported that the dip in the figures was largely due to domestic factors like high input costs and supply side constraints like overcrowded ports and roads. India is currently facing a shortfall of nearly 114 million metric tons of coal required to produce electricity and keep its factories running. India’s central bank, meanwhile, is watching the inflation numbers in order to trim borrowing costs to boost growth. The central bank had raised interest rates by nearly 375 basis points since March 2010 to combat inflation. During its policy meetings in 2012, the central bank refrained from cutting rates but chose to reduce the cash reserve ratio. India’s inflation, which trended down a bit in late 2011 again showed signs of rising in February, during which month it jumped 6.95%. In another note of weakness for India, the Purchasing Manager’s Index measured by HSBC, has consistently fallen over the past three months. After falling to 56.6 in February from 57.5 in January, the reading fell to a low of 54.7 in March. HSBC reported that the dip in the figures was largely due to domestic factors like high input costs and supply side constraints like overcrowded ports and roads. India is currently facing a shortfall of nearly 114 million metric tons of coal required to produce electricity and keep its factories running.

In our second part we will continue to look at the key remaining Asian Emerging Economies of South Korea, Indonesia, Thailand, The Philippines and Taiwan. Epsilon Capital Management is an independent investment advisory firm which focuses on global equities and options markets. Our analytical tools, screening techniques, rigorous research methods and committed staff provide solid information to help our clients make the best possible investment decisions. All views, comments, statements and opinions are of the authors. For more information go to