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Christopher Wood christopher.wood@clsa.com +852 2600 8516<br />
Figure 20<br />
MSCI Emerging Markets Index and US Dollar Index<br />
1,400<br />
MSCI Emerging Markets<br />
US Dollar Index (RHS)<br />
130<br />
1,200<br />
120<br />
1,000<br />
110<br />
800<br />
100<br />
600<br />
90<br />
400<br />
80<br />
200<br />
70<br />
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
2006<br />
2007<br />
2008<br />
2009<br />
2010<br />
2011<br />
2012<br />
2013<br />
2014<br />
2015<br />
2016<br />
2017<br />
2018<br />
2019<br />
Source: Datastream, Bloomberg<br />
This is particularly important for China given that a strengthening US dollar has raised the risk of<br />
renewed capital outflow pressure; though in the past year China managed to control such outflow<br />
pressure despite the stronger US dollar, as reflected in the declining deficit in the net errors and<br />
omissions items in the balance of payments. Thus, the net errors and omissions deficit declined by<br />
42% YoY from US$156bn in 1Q-3Q17 to US$89bn in 1Q-3Q18; though it should be noted that it<br />
rose from US$11bn in 2Q18 to US$40bn in 3Q18 (see Figure 21), based on data released at the end<br />
of December.<br />
Figure 21<br />
China balance of payments: Net errors and omissions<br />
60<br />
(US$bn)<br />
China net erros & omissions<br />
Annualised (RHS)<br />
(US$bn)<br />
100<br />
40<br />
50<br />
20<br />
0<br />
0<br />
-50<br />
(20)<br />
-100<br />
(40)<br />
-150<br />
(60)<br />
-200<br />
(80)<br />
-250<br />
(100)<br />
-300<br />
Mar 01<br />
Mar 02<br />
Mar 03<br />
Mar 04<br />
Mar 05<br />
Mar 06<br />
Mar 07<br />
Mar 08<br />
Mar 09<br />
Mar 10<br />
Mar 11<br />
Mar 12<br />
Mar 13<br />
Mar 14<br />
Mar 15<br />
Mar 16<br />
Mar 17<br />
Mar 18<br />
Source: State Administration of Foreign Exchange (SAFE)<br />
What is clear in many parts of Asia is that there is significant room to ease monetary policy if Fed<br />
tightening ends and, with it, US-dollar strength. This is both because of a lack of inflationary<br />
pressures, as well as the willingness of Asian central banks to raise rates this cycle just to defend<br />
their currencies regardless of domestic growth. Indonesia is the best example of this dynamic, as<br />
discussed here last week (see GREED & fear – Unseasonal vol, 27 December 2018). India is also<br />
another country where the central bank, under new leadership, has potentially a lot of room to ease<br />
with the policy repo rate at 6.5% or 4.2 percentage points higher than CPI which is the Reserve<br />
Bank of India’s formal target. GREED & fear is Overweight both markets.<br />
Thursday, 3 January 2019 Page 11
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