The big trigger that came in today’s market was clearly the GDP numbers that were released by the Chinese Government. Mark Tan Keng Yew, Director of UOB Asset Management puts some perspective into those numbers.

According to him, the Chinese GDP is going to be very strong; liquidity has been very strong and sees the Chinese Government resorting to tightening measures, particularly raising the reserve ratio in order to stabilise the trade supply that keeps coming in. 
 

Q: They have come in with the GDP at 11%, which is above expectations. What do you think the Central Bank will do right now - hike interest rates or look at alternative measures like hiking the reserve ratios?

A: The Chinese GDP is going to be very strong; liquidity has been very strong and we expect further tightening measures by the Government, particularly raising the reserve ratio in order to stabilise the trade surplus that keeps coming in. So, actually what has been happening is not very different from what we have seen in the past one year or so.

The Chinese Government has actually been steadily tightening the monetary policy in order to slowdown economic growth as well as drain out the liquidity that is coming to China through the trade surplus. So I do not think it is very different from what we are expecting.

Q: How many rate hikes do you expect coming in from here? We have seen one rate hike last month in terms of tightening this growth in GDP. How many rate hikes do you see the Government announcing or looking at?

A: I think most of the measures have actually been to raise reserve ratio rather than a rate hike. The raising of reserve ratio is probably the more direct way for the Government to put a stop to the liquidity coming to the trade surplus actually. So I expect more of that to happen. There will probably be also raising of the interest rates in China as well given the fact that with inflation now at 3.3%, some think that the deposit rates are at the real interest rates, which is actually negative. So yes, I would expect another interest rate hike.
 

Q: The other aspect of the market has been the CPI numbers, which too are coming at higher and alarming levels, in comparison. which is a subject of concern. What impact will this data have across the Asian markets right now?

A: I think that the trade situation has been more unique in the sense that it is facing a tightening situation because across the rest of the Asia, interest rates are either turning down or at hold; they are not raising it. You can see that in Asia, Philippines and Singapore as well, where they will probably follow the cue more from what is happening with the US interest rates. So I do not think that China’s tightening of interest rates will actually have an impact on the other Asian economies doing likewise.

Q: Specifically, with regards to the Chinese currency at this point of time, do you think that the Central Bank in China would allow the Yuan to appreciate much from these levels?

A: Yes, they have this policy to allow the appreciation of the Yen and I think they are targeting about 5% a year, but they could probably hasten the appreciation of the Yen as another means of wish to control the liquidity that is coming into China and try to spread on the trade surplus. So yes, I expect more appreciation on the Yen going forward given that they are still very much undervalued.

Q: Specifically, with regards to liquidity, how does that change in the context of the Central Bank in China raising rates? Also, there were reports that there may be a hike of interest rates in Japan. How does that change a liquidity scenario for emerging markets and India par se in that basket?

A: Definitely, we have to watch the Yen carry trade as a part of liquidity but even without that happening, there is still a lot of liquidity and that is coming just from the internal savings in China, which is starting to be put into the stock market. So that one is very strong sort of liquidity; the other of course is global liquidity from pension funds and the like. So I think that the liquidity situation will still continue to be very strong irrespective of what is happening in China.

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