27 10 2010

Tags: MAS

WRITTEN BY BLOOMBERG

WEDNESDAY, 27 OCTOBER 2010 12:02

Singapore’s central bank said Asia faces growing risks from capital inflows and called for “close monitoring” by policy makers to avoid a disorderly reversal. The region’s “brighter” economic outlook compared with the rest of the world may result in higher inflationary pressures, the Monetary Authority of Singapore, or MAS, said in a twice-yearly review today. Singapore’s economy, which may hit a “soft patch” in the coming quarters, should keep expanding, it said.   “Inflationary pressures remain significant in Asia,” the central bank said. “Large capital inflows into the region have continued to fuel activities and prices in the asset markets, which could also pose a risk to the inflation outlook.”   Growth in Asia is outpacing the rest of the world, prompting policy makers to raise interest rates ahead of their counterparts in the U.S. and Europe to fight inflation and prevent asset price bubbles. Singapore’s central bank signaled this month it will allow faster gains in its dollar, its main tool to manage inflation, after undertaking a one-time revaluation in April.   “The policy decision was made on the assessment that the level of economic activity would remain high, as the domestic economy would continue to expand, albeit at a slower and more sustainable pace,” the central bank said. “Compared to this year, when the manufacturing sector experienced a sharp surge in activity, gross domestic product growth next year will be driven more by the services sector.”   OVERSEAS DEMAND Singapore has remained vulnerable to fluctuations in overseas demand for manufactured goods even after the government boosted financial services and tourism. The International Monetary Fund this month lowered its 2011 forecast for world growth, citing high unemployment, public debt and fragile banking systems as risks.   “The outlook for Singapore’s key trading partners will remain uneven,” according to the report. “Notably, the advanced economies will continue to face significant hurdles in transiting from public sector-driven to private demand-led growth. While the risk of the developed economies slipping back into recession has generally receded, final demand is likely to remain sluggish.”   The city’s two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants. The central bank reiterated the government’s forecast for a 2010 expansion of as much as 15%, and said the $182 billion economy will “grow in line with its potential” in 2011, without providing figures.   CURRENCY GAINS The Singapore dollar has gained more than 8% against the U.S. currency this year. At its April monetary policy review, the central bank said it would shift the local dollar to a stronger range to trade in and sought an appreciation thereafter, the first such combined move in its history.   On Oct. 14, the central bank said it will steepen and widen the currency’s trading band while continuing to seek a “modest and gradual appreciation.”   The Singapore dollar “has fluctuated in the upper half of the exchange-rate policy band” since the April policy review, the monetary authority said in today’s report.   Singapore’s inflation last month accelerated to the highest level since January 2009, rising 3.7% from a year earlier. Consumer price gains are forecast to quicken to about 4% by the end of the year, the central bank said today.   Prices will average between 2.5% and 3% in 2010 and will be between 2% and 3% next year, it said. Inflation may be driven by higher global commodity prices and domestic labor and accommodation costs, the central bank said.   “Given these upside pressures to inflation, MAS deemed it appropriate to tighten monetary policy at this juncture to dampen external inflation as well as to provide the necessary macroeconomic restraint on domestic economic activity, thereby ensuring that cost and price pressures do not become entrenched,” according to the report.

China hides rampant inflation in money binge

Patrick Chovanec

Money, money everywhere. At least that’s what it feels like at the moment in China. Awash in luxury cars, condos and expensive jewellery, the Chinese are enjoying what looks to be an unstoppable boom.Bloomberg

The writer is an associate professor at Tsinghua University’s School of Economics and Management and is an independent fund adviser. The opinions expressed are his own.

>> China’s rate hikesand Singapore B1

Inflation figures due today should give pause to those who assume China’s economy is on sound footing. To an extent few appreciate, China’s astonishing growth rates these past two years have been fuelled by an even more astonishing expansion of its money supply, by more than 50 per cent. Until now, the inflationary consequences have been largely camouflaged in the form of rising asset prices.

High-end property prices in dozens of Chinese cities doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at US$3,000 ($3,950) an ounce, up 50 per cent in the past couple of months, while packets of certain types of Da Hong Pao tea are going for US$30,000 a kilogramme.

Art and wine auctions in China are pulling in record prices, while the Shanghai stock market surged 8.5 per cent last week to the highest level in almost six months.

Now there are signs that inflation is spilling over into consumer prices. China’s CPI has been climbing steadily all year and Chinese officials are making noises about raising their CPI target to 4 per cent or even higher. Food prices gained 7.5 per cent in August, from a year earlier. Economists estimate wages are rising about 8 per cent. The HSBC Holdings Purchasing Manager Index survey for August reported a marked increase in input cost being passed along in higher output prices.

As inflation comes out from hiding, the authorities may be forced to sharply rein in liquidity, turning China’s cash-fuelled boom into a bust.

If it seems like there’s a lot of money sloshing around the Chinese economy, that’s because there is. Over the past two years, M1 expanded by 56 per cent, M2 by 53 per cent.

Currently, even with much-touted “cooling measures”, both are still growing at an annual rate of about 20 per cent.

Unlike the United States, China never really had a fiscal stimulus, where the government spends its own money directly.

The funding for infrastructure and other projects to juice up the Chinese economy came almost entirely from a boom in lending by the state-run banking system.

Last year, those banks made almost 10 trillion yuan ($2 trillion) in new loans — more than double any previous year — expanding the country’s loan portfolio by a third. This year, they will probably lend 8 trillion yuan, almost twice as much as in 2008.

Where did all that money come from?

It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing”.

The pressure behind this monetary eruption had been building for some time.

For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.

To prevent that, the authorities try to “sterilise” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.

The main tool used to boost bank reserves was the annual lending quota imposed by the central bank. Since banks could lend up to the quota, but no more, most had no choice but to hold excess reserves beyond their reserve-requirement ratios. Then last year, the lending quota went out the window. Actual reserve ratios fell from 21 per cent to about 17 per cent.

China’s central bank issued more “sterilisation” bonds, but effectively, it stopped sterilising. Trillions of yuan, formerly locked up in bank reserves, flowed into the economy.

The amount of yuan created far exceeds even China’s nominal, stimulus-fuelled gross domestic product growth for the period.

When money is created at a faster rate than real economic growth, the result is inflation.

Yet so far this year, China’s official statistics show consumer inflation at barely over 3 per cent. Those figures have many economists scratching their heads, wondering where the inflation went, while most people in China seem content to believe their country has found a fantastic new formula for prosperity.

In reality, there is rampant inflation in China.

It’s just showing up in asset prices.

The new money that was created entered the economy as loans, mainly to fund investment in fixed assets. When it finally reached consumers, they bought tangibles, like property, instead of spending on consumer goods.

Asset-price inflation is tricky because it doesn’t feel like inflation.

When the price of bread doubles, it feels like it’s getting harder to make ends meet.

When condo prices double, it looks like smart investors are getting rich. But it’s only a matter of time before asset inflation starts working its way through the rest of the economy as broader price inflation — and puts China’s policymakers in a serious bind.

Japan govt says economy at standstill

TOKYO

In a monthly report, the government downgraded its assessment of the economy for the first time since Feb 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession.

“If the economy turns out as expected in our main scenario, we may end up describing the current situation as a soft patch,” said the official at the Cabinet Office, which compiled the report. “But if it comes under further downward pressure, it could end up slipping into recession,” he said.

The government also cut its view on exports and industrial output, saying they were weakening,

which prompted the downgrade of its overall economic assessment.

A rise in the yen to a 15-year high against the dollar added to these woes.

Faltering recoveries from the global financial crisis in developed economies have pushed global investors into emerging markets in search of higher returns, driving up their currencies.

The move has been exacerbated by widespread expectations that the United States Federal Reserve will print billions of dollars to try to lift the US economy, sparking concerns that the extra liquidity will find its way into emerging markets.

Japan’s policymakers had earlier prompted the government to draw up a supplementary budget and the central bank to offer cheap loans and to promise to buy assets.

The government said it wanted the Bank of Japan to support the economy through “appropriate and flexible” monetary policy while the two branches work closely together — phrasing it used when it announced ¥5.05 trillion ($$80 billion) in stimulus spending on Oct 8.

The currency tensions will dominate a Group of 20 finance ministers’ meeting in South Korea starting on Friday and a G20 summit in November, as officials look to tackle the economic imbalances and the threat of competitive currency devaluation.

“Currencies will be the topic that many people will be talking about ... at the G20. I hope that good ideas will be put forward there and we will explain the present situation in Japan,” Finance Minister Yoshihiko Noda said.

Japanese Prime Minister Naoto Kan said yesterday he wants to implement stimulus measures as quickly as possible to support the expansion of the economy. — Japan’s government said yesterday the economy was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.AGENCIES

Dr Prasarn Trairatvorakul struggled for balance as the ferry taking him across a Bangkok river pitched in choppy waters.

TOO MUCH OF A GOOD THING

It’s not as fun as it sounds for Asian policymakers.

They are caught by the biggest economies flooding markets with money and warring over currencies.

“I am concerned,” says Dr Prasarn.

“Thailand is not a large economy but we are very open. The saying goes that when elephants fight, the grass is trampled.”

That’s quite a challenge for Dr Prasarn, who took over as central bank head on Oct 1. Asia has too much of a good thing on its hands as money gravitates this way.

The trick is to make sure it is used productively and to avoid dangerous bubbles.

The trick for Mr Bernanke, meanwhile, is making sure that the US economy captures more of the Fed’s stimulus.

How that can be accomplished is easier said than done.

Capital controls?

A tax on investment outflows?

Over lunch in Bangkok, I posed these questions to well-known economists Barry Eichengreen of the University of California, Berkeley, Takatoshi Ito of the University of Tokyo and Eswar Prasad of Cornell University — all of whom were in town for a Bank of Thailand symposium. They agreed it’s unclear how the US can adequately address its monetary-leakage problem.

The answer for Asia may be as simple as tightening fiscal policy. That, Prof Eichengreen says, could take some of the heat out of economies being overwhelmed by hot money.

Even so, there’s no getting around the fact that loose international monetary conditions are swamping domestic policy steps.

Sure, officials in Bangkok or Seoul could raise rates but it would make little difference with the world’s main monetary authorities leaving the floodgates open.

Also, higher borrowing costs could backfire, attracting even more capital as yield hungry investors reach for better returns.

Asia’s initial public offering activity is worth eyeing in the months ahead. Recent surveys show the highest levels of investor sentiment in months.

Will too much liquidity chasing too few good IPOs create demand for weaker ones?

There’s lots of anecdotal evidence, London-based Coggshall says, that “investors’ positioning has swung sharply towards ‘risk on’, and while we too find it difficult to argue against the notion that unlimited liquidity trumps all else, the level of activity is just frothy enough to make us uncomfortable”.

The good news is that Asian policymakers are fully aware that they are on the front lines of a monetary tsunami the likes of which the world have never seen.

The bad news is that with the US, Japan and the euro zone holding rates at, or close to, zero and China maintaining an undervalued currency, it’s all too easy for smaller economies to get overwhelmed.

My chat with Dr Prasarn on a Bangkok ferry was an ideal metaphor for where Thailand finds itself — navigating the rough waters of today’s global markets. While they are doing a fine job staying afloat, Thai officials never know when and where the next giant wave of capital will crash.

Frightening, indeed. BLOOMBERG

William Pesek is a Bloomberg News columnist.

The opinions expressed are his own.

“It’s a bit like the world economy these days,” the Bank of Thailand governor deadpanned as he plopped down next to me on a ferry deck chair. “Very hard to control.”

Dr Prasarn would certainly know.

Thailand may offer the best example of a curious phenomenon: How the Federal Reserve’s ultra-low interest rates are benefiting Asia more than America. Excess central bank liquidity explains the disconnect.

Asia is getting loads of it, US assets are getting little.

This hot money is making waves in Asia. It is pumping up growth, real estate and stocks and, according to many economists, breathing new life into the “Asia decoupling” narrative.

Asia hasn’t decoupled from the West so much as it has mutated into a giant net catching money emanating from Washington, Frankfurt and Tokyo. The result may be huge bubbles, the next wave of which could be dodgy stock offerings.

Going forward, “the average quality of new offerings is beginning to fray slightly around the edges,” says Mr Jeff Coggshall, a hedge fund manager at Tiburon Partners LLP.

Why does it matter?

“A number of deals have mysteriously been pulled forward,” he adds. “It will doubtless not be long before some genuinely frightening IPOs begin hitting our desks.”

If Fed chairman Ben S Bernanke wants to know who is benefiting most from his policies, Bangkok is as good a place as any to look. Thai stocks are up a spectacular 52 per cent this year, while the Standard and Poor’s 500 Index is up 5 per cent.

Thailand, which is growing 9.1 per cent, isn’t alone. Singapore’s 10.3 per cent growth is another case in point. So are growth rates in Malaysia (8.9 per cent), the Philippines (7.9 per cent), South Korea (7.2 per cent) and Hong Kong (6.5 per cent).

Stock markets are booming even as America’s funk is deepening.

The reason: Investors know that any move by the Fed to further ease monetary policy means more liquidity is about to zoom Asia’s way.

It’s ironic, really. The US is desperate to aid its beleaguered export industry and all it’s doing is exporting the stimulus needed at home.

Asia and the monetary tsunami

Scary IPOs and overwhelmed economies could be the price of the US’ ultra-low rates

William Pesek

Asia’s IPO activity is worth eyeing in the months ahead. Recent surveys show the highest levels of investor sentiment in months.

Will too much liquidity chasing too few good IPOs create demand for weaker ones?

China raises key rate for the first time since 2007

Bloomberg

BEIJING

The one-year lending rate will increase to 5.56 [+0.25] per cent from 5.31 per cent effective today, the People’s Bank of China said on its website. The deposit rate will increase to 2.5 [+0.25] per cent from 2.25 per cent.

“This is a bucket of cold water for the market,” said Capital Securities analyst Zhang Yuheng in Shanghai.

The tightening would hit both equities and commodities, he said.

The impact was also felt by global markets across the board after the announcement last night. Oil prices fell, stock markets turned negative in Europe and the US dollar rose as investors were caught off guard by the tightening step.

Inflation hit 3.5 per cent in August over a year earlier, above the official annual target of 3 per cent.

Data to be released in Beijing tomorrow may show that September inflation climbed to 3.6 per cent or more even as economic growth moderated, analysts said. — China has unexpectedly raised its benchmark lending and deposit rates for the first time since 2007, ahead of data that may show inflation accelerated to the fastest pace in almost two years.Agencies

Singapore’s

energy ‘trilemma’

Regulations and tiered pricing won’t be enough to help

Singapore control its energy usage, says Trade Minister Lim

WHY  did  Singapore  sell  SPC  to  ChinaPetrol    ? ? ? ?

‘noise’ in the market

Economists have an explanation for this.

Almost all of them agree that an excessively

loose monetary policy — with interest rates kept low for too long invariably leads to asset inflation and this includes property.

[lOw  interest  rate  is  the EVIL  which drIves  dOmestIc  Internal  InflatIOn    ? ? ? ?]

At the micro level, individuals cannot comprehend this. It does not help that there is a lot of “noise” in the market.

Instead they see rising asset prices — of houses, stocks, bonds — touted as a reflection of the real wealth being created.

At a seminar on Asia’s property markets last month, a speaker said exuberance in the Asian property sector is hard to rein in once the market has accelerated.

Despite government cooling measures, he said the inflow of money from the United States and Europe into Asia will continue.

On the local scene, we are seeing buyers slowly returning as developers push out more projects. In the aftermath of the latest cooling measures, the current market sentiment dictates that developers either go for sales or prices.

The majority appear to go for prices. Not surprisingly, sales have slowed but are showing signs of improving.

Meanwhile, developers continue to bid for land and secure redevelopment plots from collective sales even as they know future supply is growing ever larger.

When will it stop?

I think not, if there continues to be reasonably healthy buying.

Although sales of HDB resale flats have cooled, I am still not sure whether prices have or will correct in the short term.

Looking at the statistics, the fresh supply of resale flats will get worse before it gets better.

This number is fixed by the number of flats the HDB has completed over the past five to seven years. They are available for resale once the minimum occupation period of five years have been fulfilled.

Is the clampdown on buying of resale flats for investment sufficient to turn the market?

It depends on how big this component was before the measures were announced. Of late, we have seen some of these monies go into HUDC flats.

MAS tightens monetary policy

Mr Seah added: “The impact of a strong Singapore dollar on the tourism industry here will probably be quite minimal because our major markets are the regional countries and most of these countries’ currencies are expected to appreciate too.”

Association of Small and Medium Enterprises president Lawrence Leow noted that the volatile global currency movements have been “troubling a lot of companies because some of them have businesses in multiple locations”.

Wholesalers such as Mr Pierre Yap pointed out that a stronger Singapore dollar “will mean that our margins will probably suffer ... and we won’t be as competitive”.

Still, Mr Wong Hong Mong, who owns Food Corporation Singapore, felt that rising costs was the biggest concern for businesses for now.

[hIghest  cOntrIbUtIOn  tO  street  fOOd  prIces  is  the  hIgh  RENT    ? ? ?  ?  and  fOOd  cOUrt  mIddleman  and  wet  market  mIddleman  and  hawker  centre  mIddleman    ? ? ? ?]

Said Mr Wong: “Demand has dropped but we’re more worried about inflation rising for a prolonged period.”

OCBC economist Selena Ling felt that overall, the appreciation of the Sing dollar “should benefit the man on the street”.

[S$ rIsIng  agaInst  USD  bUt  fallIng agaInst  AUD    ? ? ? ?  There are mOre  fOOd  impOrts  frOm  Australia  rather than USA    ? ? ? ?] 

She expects inflation to hit 4.7 per cent in the fourth quarter, with full-year inflation keeping within the Government’s forecast, at 3 per cent.

Said Ms Ling: “Most of our food are imported, so the impact on food prices should be minimal. And as long as labour market remains tight, wage expectations and wage increments should adjust higher too.”

Monetary policy tightened

MAS signals its intent to combat inflation, even as economic growth slows

Millet Enriquez and Teo Xuanwei

emelita@mediacorp.com.sg

SINGAPORE

The move, which allayed the fears of business owners and consumers about rising costs, sent the Singapore dollar soaring to a record high against the greenback — it also sent the US dollar tumbling against a wide range of currencies.

The US dollar was at 1.2953 against the Singapore dollar and was being quoted at a record low of 1.2893 shortly after MAS’ announcement.

While some experts worldwide expressed surprise at the global impact of MAS’ move, a Barclays Capital report pointed out that Singapore was “seen as a barometer of Asian economic growth” and investors may read MAS’ move “as a sign of greater willingness” on the part of other central banks in the Asian emerging economies to allow the US dollar to further depreciate.

In its half-yearly policy review yesterday, MAS announced that in its bid to head off inflation, the slope of its policy band “will be increased slightly, with no change to the level at which the band is centred”. The policy band will also be “widened slightly in view of the volatility across international financial markets” — the last time it did so was in September 2001, after 911.

Domestic inflation “rose significantly” from 0.9 per cent in the first quarter to 3.2 per cent in July and August, the MAS noted.

will benefit from savings on the exchange rate”.— Taking global markets by surprise, the Monetary Authority of Singapore (MAS) tightened its monetary policy yesterday — signaling its intent to combat inflation even as the Republic’s economic growth slows.

BOJ drops interest to zero — In a surprise move, Japan’s central bank yesterday lowered its benchmark overnight rate target to a range of 0 per cent to 0.1 per cent, a small absolute change from its previous target of 0.1 per cent but a large symbolic slide into an age of zero interest rates.

As strong yen hits outlook, bank sets up $79b fund to fight deflation

TOKYO

The Bank of Japan (BOJ) also said it would establish a ¥5 trillion ($79 billion) fund to buy Japanese government bonds, commercial paper and other asset-backed securities, stealing a march on the United States Federal Reserve in providing a fresh dose of economic stimulus. The BOJ also retained its soft loan facility worth ¥30 trillion for banks.

The yen weakened to almost 84 against the US dollar in a knee-jerk reaction to the BOJ news, but later rebounded to 83.40 on short-covering, slightly stronger than before the announcement.

Stock market sentiment was more positive, with the benchmark Nikkei 225 index jumping 1.5 per cent to close at 9,518.76 after having spent much of the day in the red.

For months, the central bank had eschewed government calls for more decisive action. But as concerns heightened about weakening growth in the Japanese economy — the world’s third-largest, after the US and China — the BOJ carried out what its governor Masaaki Shirakawa described as “comprehensive monetary easing”.

Markets Soaring "But the World Is Worse Off," Jimmy Rogers Says

CPF SMRA minimum interest rate extended for another year

SINGAPORE

In a statement yesterday, Manpower Minister Gan Kim Yong said that, despite Singapore’s strong economic recovery, interest rates have remained low.

He added that a sharp drop in interest rates at the expiry of the four-per cent floor rate may impact CPF members who have yet to benefit fully from the economic recovery.

Since January 2008, SMRA savings have been invested in 10-year Singapore Government Securities (10YSGS), a market-based rate — plus one-per cent — for instruments of comparable risk and duration.

To provide for the transition, the Government had committed to the 4-per cent floor rate for SMRA interest up to last December.

This was first extended a year, due to global economic conditions and the exceptionally low interest-rate environment last year.

Citigroup economist Kit Wei Zheng told MediaCorp the latest move would protect CPF savings from being “eroded” should the inflation rate rise from its current level of “over three per cent to four per cent by the end of the year”.

From 2012, the minimum interest rate will be 2.5-per-cent per annum.

When he explained the CPF changes in 2007, Finance Minister Tharman Shanmugaratnam said the peg to long-term bond rates would offer members “better returns over time with slightly higher interest rate risk” on their SMRA.

The 10YSGS is now 2.15 per cent. In January last year, it was 1.7 per cent.

Mr Kit said Singapore bond yields are influenced by United States bond yields and that interest rates are “near historic lows” and expected to remain so for some time with the “sluggish” US recovery.

So does the decision to peg SMRA rates to long-term bond rates hold?

“It appears it’s not working well. Back in 2007, no one anticipated the 10YSGS yield would fall or that the US would be hit by a deep recession,” said Mr Kit, who suggested adding two per cent to the 10YSGS instead of the current one per cent.

Interest rates could rise, though, if the US economy improves. “How fast and when depends on global economic outlook,” said Mr Kit.

When that happens, the Government would probably not extend the floor rate of 4 per cent since the formula of 10YSGS plus one per cent would give better returns, he added. — The Government has extended the 4-per cent minimum interest rate for Central Provident Fund savings in the Special, Medisave and Retirement Accounts (SMRA) for another year — the second time it has been extended.Esther Ng

property@mediacorp.com.sg  The writer is head of research and consultancy at Chesterton Suntec International.