China Pledges $42 Billion In A Slew of Measures to Support the Struggling Property Sector

Economic

Summary:

These and other measures announced Friday marked Beijing’s latest efforts to address issues in the massive real estate sector.

Chinese authorities on Friday pledged new support for state-owned enterprises to enable them to buy unsold apartments, in an effort that could help developers get more funding to finish construction on pre-sold properties.

These and other measures announced Friday marked Beijing’s latest efforts to address issues in the massive real estate sector.

“I think it is encouraging that the policy is taking a turn of direction trying to support the housing market,” said Zhu Ning, a professor of finance at Tsinghua University and author of the book “China’s Guaranteed Bubble.”

People’s Bank of China Deputy Governor Tao Ling told reporters at a briefing Friday the central bank would provide 300 billion yuan ($42.25 billion) to financial institutions to lend to local state-owned enterprises (SOEs) so they can buy unsold apartments that have already been built.

The central bank expects the support to release 500 billion yuan in financing for such purchases, which the SOEs could turn into affordable housing.

The real estate companies can then use funds earned from those sales to complete construction on other apartments, the central bank said.

As for unfinished, pre-sold properties, the National Financial Regulatory Administration Deputy Director Xiao Yuanqi told reporters that commercial banks have provided 935 billion yuan in loans to finish construction on whitelisted projects since the program was released in January.

“The government’s purchase of housing inventory can inject more liquidity to developers, who could then have more resources for housing delivery,” Larry Hu, chief China economist at Macquarie, told CNBC. “Finally the government stepped in as the buyer of the last resort.”

“At this stage, it’s mainly SOEs and local governments to implement the policies, but their resources may be too limited to move the needle at the macro level,” he said. “Later on, we might see more efforts from the central government.”

Earlier on Friday, Vice Premier He Lifeng spoke at a national videoconference meeting on ensuring the completion and delivery of pre-sold homes, according to state media.

Officials speaking to reporters Friday said that housing projects that could not meet the requirements to be on the whitelist needed to address their issues on their own.

Developers “that must go bankrupt should go bankrupt, while those that need to be restructured should be restructured,” Dong Jianguo, deputy head of the ministry of Housing and Urban-Rural Development, told reporters in Mandarin, translated by CNBC. He said homebuyers’ interests and rights should be prioritized, and those that violate the law should be punished.

Resolving China’s real estate problems will take time.

Among the challenges the recent measures face, Zhu pointed out that local governments still have limited fiscal resources, which constrains the amount they can buy.

“There can be quite some rent seeking and moral hazard in determining what to buy and what to pass,” he added. Rent seeking refers to when someone seeks to make more money without creating more value.

“Unless potential home buyers sense some serious change of housing prices going up, the current housing price is still too expensive for household income or rent yield,” he said. “However, I am not sure whether the government is willing to go as far as to engineer another big run-up in housing prices.”

The People’s Bank of China on Friday removed a floor on mortgage interest rates, and lowered the minimum down payment ratio for first- and second-time home buyers.

Pre-sold, unfinished homes

For years, many apartments in China tended to be sold before construction was finished. However, delays in deliveries of completed apartments have increased in recent years as developers have run into financing difficulties.

Nomura estimated last year there were around 20 million such pre-sold, unfinished apartments in China.

At the current sales pace, it will take more than two years to clear the existing stock of new homes, according to a Caixin report citing a local research firm as of March. That’s nearly twice as long as the historical pace of 12 to 14 months, the report said.

The official 70-city house price index released Friday fell more quickly in April than in March, according to Goldman Sachs analysis that looks at a seasonally adjusted, annualized weighted average.

The figures indicated an 8.5% month-over-month decline in April, steeper than 5.6% in March, Goldman said.

“Despite more local housing easing measures in recent months, we believe the property markets in lower-tier cities still face strong headwinds from weaker growth fundamentals than top-tier cities, including the more severe oversupply problems,” the report said.

Source:CNBC

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Thomas

Economic

Forex

The People's Bank of China and Loan Prime Rates in Focus

On Monday (May 20), the People's Bank of China (PBoC) will put the AUD/USD in focus. After policy measures from Beijing to bolster the real estate sector, the PBoC will set the 1-year and 5-year Loan Prime Rates (LPR).

Economists expect the PBoC to leave the 1-year and 5-year LPRs unchanged at 3.45% and 3.95%, respectively.

An unexpected cut to the 1-year or 5-year LPRs could support buyer appetite for the Aussie dollar. More accommodative policy measures would reduce corporate and household lending costs and increase demand.

China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%. Moreover, 20% of the Australian workforce is in trade-related jobs. An improving demand environment could boost the Australian economy and labor market.

However, investors should monitor RBA commentary following the recent labor market data. The unemployment rate unexpectedly increased from 3.9% to 4.1% in April. Additionally, wage growth slowed from 4.2% year-on-year in Q4 2023 to 4.1% in Q1 2024.

Deteriorating labor market conditions and softer wage growth could reduce disposable income. Downward trends in disposable income could affect household spending and dampen demand-driven inflation. The recent data reduced investor expectations of an RBA interest rate cut to tame inflation.

US Economic Calendar: FOMC Member Speeches in Focus

Later in the Monday session, FOMC member commentary warrants investor attention.

Last week, FOMC members Raphael Bostic, Loretta Mester, and Michelle Bowman warned about needing a higher-for-longer Fed rate path to bring inflation to the 2% target. Significantly, Michelle Bowman discussed an interest rate hike if inflation trended higher.

FOMC members Raphael Bostic, Christopher Waller, Michael Barr, and Philip Jefferson are on the calendar to speak. Comments about inflation and the timing of a Fed interest rate cut need consideration.

Recent inflation and retail sales figures raised investor bets on a September Fed rate cut despite the hawkish comments. According to the CME Fed WatchTool, the probability of the Fed leaving interest rates unchanged in September declined from 38.8% to 35.2% in the week ending May 17.

Increasing concern about sticky inflation could test the investor bets on a September Fed rate cut.

Short-Term Forecast

Near-term AUD/USD trends will likely hinge on the PBoC, RBA commentary, and FOMC member chatter. An unexpected cut to the LPRs could influence buyer demand for the Aussie dollar but may not immediately impact sentiment toward the RBA rate path. However, hawkish Fed chatter may reduce investor bets on a September Fed rate cut and tilt monetary policy divergence toward the US dollar.

AUD/USD Price Action

Daily Chart

AUD to USD Forecast: Australian Dollar in the Hands of the PBoC and the Fed_1

The AUD/USD sat comfortably above the 50-day and 200-day EMAs, confirming the bullish price trends. Moreover, the 50-day EMA converged on the 200-day EMA. A 50-day EMA bullish cross through the 200-day EMA could send further bullish signals.

An Aussie dollar break above the $0.67003 resistance level would support a move to the $0.67500 handle. A breakout from $0.67500 could bring the $0.67967 resistance level into play.

The PBoC and FOMC member comments need consideration.

Conversely, an AUD/USD drop below the $0.66500 handle could give the bears a run at the $0.65760 support level and the EMAs. Buying pressure may intensify at the $0.65760 support level. The EMAs are confluent with the support level.

With a 14-period Daily RSI reading of 64.59, the AUD/USD may return to the $0.67500 handle before entering overbought territory.

Source: FX Empire

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Risk Warnings and Disclaimers

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Samantha Luan

Economic

When US markets reopen next Tuesday after the long weekend, everything will likely seem normal. It’s only after the close and in the following days that any cracks are expected to appear.

A spike in the number of failed trades, operational glitches and additional costs are among industry fears as the trading process for American securities accelerates, with the time allowed to complete every transaction halved to a single day.

Spurred on by the original meme-stock frenzy, the Securities and Exchange Commission is pushing the shift to reduce the chance of something going wrong between when a trade is executed and when it’s settled. But the switch to what’s known as T+1 comes with risks of its own.

Speedier Wall Street Trades Are Putting Global Finance On Edge_1

International investors — who hold about $27 trillion in American markets — face a system in which the usual method of funding a US trade takes longer than they actually have to execute the deal. Unheralded parts of the trading process like affirmation (confirming details), fixing errors, and recalling securities out on loan must happen at least twice as fast. Global funds face a mismatch where cash flowing in and out moves at a different speed to the assets they have to buy and sell.

And it all faces an immediate stress test as some of the world’s major indexes rebalance or reveal planned reconstitutions before the end of this month.

“All hands will be on deck,” said Michele Pitts, Citigroup Inc.’s global head of custody data for securities services, noting the likelihood of increased trade fails across the industry. “There will be a significant uptick in settlement risks for the first several weeks.”

‘Lot of Anxiety’

Under current rules, anyone purchasing a US stock has two days between hitting the “buy” button and actually having to deliver money for the trade, while the seller has the same time to supply the share. This lengthy settlement period in such a large and sophisticated market is what remains from the days when transactions were manual, and investors had up to a week to complete.

That’s been whittled away over the years, and new SEC rules will slash the settlement time again on May 28 to one day. Across Wall Street and beyond, major banks, asset managers and an assortment of specialized service firms are bracing for the fallout.

At JPMorgan Chase & Co., internal modeling shows about a quarter of the currency trades it processes for clients are set to be impacted. Brown Brothers Harriman & Co. is putting clients through a “T+1 simulator” to identify those with potential issues.

Institutions including Societe Generale SA, Citi, HSBC Holdings Plc, UBS Asset Management, Baillie Gifford and more say they’re either moving staff, reorganizing shifts or building new systems — and in some cases all three — in preparation for the switch.

“There’s a lot of anxiety even just around the technology and the actual way by which settlement will take place,” Amy Hong, head of market structure and strategic partnerships for global banking and markets at Goldman Sachs Group, told the Bloomberg Sell-Side Leaders Forum this month. “There are going to be some mismatches around funding, there are going to be some FX-related issues that we’re going to need to work out.”

The world of finance and investment can be famously averse to change, with doomsayers dependably appearing whenever new rules are proposed. Yet in the case of T+1, the concerns go beyond one or two market Cassandras.

Just 9% of sell-side firms polled by Coalition Greenwich in April and May said they expect the T+1 switch to go smoothly, with 38% warning that buy-side managers are unprepared, and 28% believing trading platforms aren’t fully ready. Almost a fifth anticipate a large disruption with “many or severe issues.”

The consensus view is that trade failures — when either a seller doesn’t deliver securities or a buyer fails to produce payment — are about to rise. The question is how large and persistent that uptick will be.

Settlement failures are generally a tiny feature of the modern market, usually stemming from technical issues or human error. They can result in regulatory punishment, loss of capital tied up in the trade, and even — in very rare instances when the transaction is large enough — the collapse of parties in the deal.

The T+1 regime increases the chance of failures because the compressed timeframe risks making errors more likely, while at the same time reducing the opportunity to correct them. Most crucially, it makes it harder for buyers and sellers to ensure their funds and securities are ready.

The $7.5 trillion-a-day foreign-exchange market is a flashpoint of the shift, because currency trades typically settle on a T+2 basis. An overseas investor buying a US stock will soon need to either have dollars ready or find them within a day in an arena where it can take two.

Friday Fears

From its Edinburgh headquarters over 3,200 miles from Wall Street, the £225 billion ($285 billion) investment house Baillie Gifford has relocated two traders to New York and beefed up its settlement desk to help the firm stay active after the 4 p.m. US stock close.

Thanks to the T+1 shift and a 6 p.m. deadline at CLS Group (a platform at the center of the market that settles over $6 trillion of currency transactions every day), that will become a crucial period for asset managers seeking dollars to fund their US trades. But it also falls around the start of what are known as the witching hours in foreign-exchange circles because of the famous lack of liquidity. Speedier Wall Street Trades Are Putting Global Finance On Edge_2

Speedier Wall Street Trades Are Putting Global Finance On Edge_2

“If you look at the bid-offer spreads, they’re generally tight throughout the day and when you get to the 5 p.m. to about 8 p.m. Eastern, they just widen out,” said Brendan Burke, a managing director at BBH. “It’s as simple as there’s less liquidity in the market because the banks aren’t staffed.”

Baillie Gifford has lobbied US regulators to get banks to extend their foreign-exchange trading hours and to continue providing liquidity until at least 6 p.m. in New York, five days a week. Since moving its staff in January, the firm has been trading as if T+1 was already in force to ensure everything goes smoothly, according to Adam Conn, head of trading.

“It’s about trying to mitigate the additional operating risk which is falling on asset managers,” said Conn. There will only be a “very short window” after the US market close to resolve problems, he said.

Friday afternoon is emerging as a particular area of concern, because currency markets close on weekends, meaning liquidity is typically at its lowest just before the US joins Europe and Asia in clocking off. JPMorgan’s Brijen Puri, head of global FX services, said “neither the buyside or sellside really knows what will happen” in those periods following the switch.

“Once there is more data about what's happening in that time zone, that's when banks as well as asset managers may decide on providing more coverage,” Puri said. “Like you have a night desk, you may have a Friday evening desk.”

The Foreign Exchange Professionals Association reckons the problem will also be acute at month- and quarter-ends and around national holidays, risking “significantly increased volatility and wider spreads.” Overseas investors acquiring US securities before a local holiday will effectively be faced with T+0 settlement.

“There’s 25 to 30 days a year where there’s potentially specific challenges,” said Vincent Bonamy, head of global intermediary services at HSBC. He has organized staffing for “specific holidays on a global basis” to help clients with liquidity provision.

For all the preparation, the European Fund and Asset Management Association estimates as much as $70 billion of its members’ daily currency trades may miss the CLS deadline for next-day settlement. Firms without a US presence can use workarounds including purchasing dollars in advance or outsourcing their currency trades, but all approaches come with their own additional costs and challenges.

“Liquidity will be a big issue,” said Natsumi Matsuba, head of FX trading and portfolio management at Russell Investments in Seattle. “It’s going to be a learning experience for everyone.”

Double Jeopardy

The move to T+1 is intended to cut risks at the broker-dealer level of the US equity market, after the 2021 meme-stock frenzy forced retail-investor platforms like Robinhood to restrict trading in certain securities. That was because the collateral they needed to post — the cash to cover trades over the two-day settlement process — threatened to exceed what they could pay amid the surge in volume.

The T+1 switch should alleviate such concerns because less collateral will be needed across a single day of risk. It may also improve domestic liquidity as cash in the market will be recycled faster. But it heaps pressure on the processes required to complete each transaction.

The new rules require that affirmations are finalized by 9 p.m. in New York on the date of a trade. Data from the Depository Trust & Clearing Corp., which oversees post-trade functions for the bulk of American securities transactions, show that affirmation rate rose to 83.5% in April from 74.95% a month earlier.

The firm says that represents “significant progress” as T+1 implementation approaches. But with only weeks to go it’s short of the DTCC’s own target for a 90% same-day affirmation rate.

“It’s not actually a compression to 24 hours, but rather five hours, if you think that the market closes at 4 p.m. and you need to affirm by 9 p.m.,” said Pitts at Citi.

In preparation for the switch, the DTCC has been conducting regular tests for nine months that will continue to the end of May. This has included gauging the industry’s ability to handle a “double-settlement day” like the one that will occur next Wednesday, when transaction volumes will surge as trades from Friday (still using T+2) and next Tuesday (T+1) will need to complete at the same time.

The DTCC has added staff ahead of the transition and its plan for this weekend includes “watch events,” where members of the technical and product teams closely follow transaction flow, according to Val Wotton, general manager of institutional trade processing. “We are confident in our ability to support volumes on day one,” he said.

Kinks in the Chain

The US switch to T+1 means it’s leaving other jurisdictions behind, which is a headache for many investment vehicles operating across borders. While Mexican and Canadian markets are also moving to one-day settlement next week, others including Europe remain on slower cycles.

In the new system, a US investor selling an ETF should get cash for their shares within one day, but the proceeds from the sale of a fund’s underlying international stocks will likely take at least two days to arrive. And when most overseas investors buy a fund containing US stocks, the new underlying assets should be paid for in one day, even though the payment for the ETF shares may take two or more.

It’s the kind of mismatch that has previously existed across various geographies, but never on this scale, and it risks adding friction and operational costs to many investment vehicles.

Adding to the pressure, the T+1 switch comes just days before MSCI Inc. indexes rebalance, with corresponding funds all over the world due to reshuffle holdings at the end of next week. For UBS Asset Management that’s the “largest trading date of the year,” according to Lynn Challenger, head of trading at the $1.7 trillion manager.

“We anticipate a lot more funding requirements” on rebalance day, said Challenger. He said any issues may be compounded by the fact that much of the order flow could be in the same direction. “We’re speaking to brokers to make sure the funding will be there,” he said.

To prepare for T+1 more generally, Challenger said UBS Asset has trained up additional US staff so they can generate FX orders and has built a new trading process to facilitate more same-day settlement.

Many financial firms have these kinds of robust transition plans in place. The Coalition Greenwich research showed most sell-side respondents were not concerned about the readiness of their own desks. Yet each is connected to others through a string of trade processes, meaning any kinks in the chain could create problems for otherwise well-prepared institutions.

“The sellside thinks there will be issues, but it will be someone else’s fault,” said Jesse Forster, a senior analyst of market structure and technology at Coalition Greenwich. “We could be in for a lot of finger-pointing over the coming months.”

Source:Bloomberg

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Glendon

Economic

The TJX Companies (TJX), the leading off-price apparel and home fashions retailer in the U.S. and worldwide, recently announced its results for the first quarter of Fiscal 2025 (ended May 4, 2024). Let's delve into the details of the earnings report, analyzing the company's performance and its outlook for the rest of the fiscal year.

Strong Sales Growth

Net Sales: TJX reported net sales of $12.5 billion, a 6% increase year-over-year (YOY) and exceeding analyst expectations. This growth indicates continued consumer demand for the company's off-price offerings, even in a potentially inflationary environment.

Comparable Store Sales: Consolidated comparable store sales, a key metric reflecting sales at stores open for at least a year, grew by 3%. This increase signifies healthy organic growth within existing stores, demonstrating customer loyalty and the effectiveness of TJX's merchandising strategy.

Profitability on the Rise

Net Income: Net income for the first quarter reached $1.1 billion, reflecting a healthy profit margin.

Earnings Per Share (EPS): Diluted EPS came in at $.93, representing a significant increase of 22% compared to the same quarter in the previous fiscal year. This growth in EPS highlights the company's efficiency in converting sales into profits.

Exceeding Expectations and Raising Guidance

Analyst Beat: The reported EPS surpassed analysts' predictions, demonstrating that TJX outperformed market expectations. This positive surprise is likely to boost investor confidence in the company's future prospects.

Guidance Raised: Buoyed by the strong Q1 performance, TJX raised its guidance for both pre-tax profit margin and EPS for Fiscal 2025. This signifies the company's optimism about its ability to maintain profitability throughout the year.

Strategic Initiatives Paying Off

Inventory Management: TJX's success can be partly attributed to its efficient inventory management practices. By offering a constant stream of new and trendy merchandise at discounted prices, the company effectively avoids overstocking and subsequent markdowns.

Customer Focus: TJX caters to a value-conscious customer segment seeking quality brands at affordable prices. The company's commitment to this core customer base remains a key strength.

Potential Challenges

Inflationary Pressures: Rising inflation can impact consumer spending habits. TJX may need to navigate this challenge by strategically managing its pricing strategy and product mix to maintain its value proposition.

Supply Chain Disruptions: Global supply chain disruptions continue to pose a risk to retailers. TJX will need to ensure efficient sourcing and logistics to maintain a steady flow of merchandise to its stores.

Looking Ahead

TJX's Q1 earnings report paints a positive picture for the company. The combination of solid sales growth, rising profitability, and raised guidance inspires confidence in its ability to navigate the current economic climate. However, staying ahead of potential headwinds like inflation and supply chain disruptions will be crucial for sustained success. Investors will be keenly watching how TJX executes its strategies in the coming quarters.

Investor Takeaways

TJX's Q1 performance exceeded expectations, demonstrating the strength of its business model.

The company's focus on value proposition and efficient inventory management continues to pay off.

Raised guidance indicates optimism about future profitability.Inflation and supply chain disruptions remain potential challenges to monitor.

Overall, the TJX Companies' Q1 earnings report is a positive sign for the company and its investors. While navigating economic uncertainties will be crucial, TJX's track record of innovation and customer focus positions it well for continued success.

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Thomas

Economic

Forex

The surging US dollar has sparked much concern about where currencies in Asia are headed. The devastation caused by the Asian currency crisis of 1997 remains fresh in many minds. So does the "taper tantrum" of 2013 when the Indonesian rupiah, Indian rupee and Philippine peso all swooned simply because the US Federal Reserve was thinking of tightening its monetary policy. Although many years have passed since those troubling events, the recent depreciation of exchange rates in Asia has led to unsettling speculation of worse to come, such as a possible devaluation of the Chinese yuan.

In the near term, this nervousness may well cause more turbulence in currency markets here. But beyond that, our sense is that the worst will soon be over. A primary reason is that we do not see the current strength of the US dollar being sustained once financial markets start examining the US dollar's fundamentals more critically. Moreover, China will not proactively devalue the yuan given its policymakers' concerns about maintaining stability. Finally, Asian economies have strengthened their resilience in the past decade: their currencies are underpinned by generally robust external balances, credible management of exchange rates and fiscal policy and stronger foreign exchange reserves. They should be further supported by rising global demand as the electronics cycle turns up and tourism continues to recover.

The US dollar cannot keep soaring and is likely to peak, easing the pressure on other currencies

The main reason why Asian currencies have weakened is the strength of the US dollar. But several of the factors that propelled the US dollar's surge are not likely to last.

Take its outperformance against other major economies in terms of economic growth. There is building evidence that US economic growth will slow in the second half of this year as the impact of higher interest rates takes a toll and as some of the supports that the economy enjoyed turn weaker. Consumer spending, for instance, could weaken. The April payrolls report showed slower job creation while other data showed the ratio of job vacancies to unemployed individuals declining, meaning income growth could ease. Moreover, the large buffer of savings that consumers built during the pandemic will have largely been spent by the second half of the year.

Another risk is the lagged impact of the brutal monetary tightening of the past two years. A risk to consumer spending comes from signs of credit stress emerging in the US economy, particularly among lower-income borrowers who are struggling to meet their loan obligations. As consumer delinquency rates rise, there are also more reports of individuals suffering a depletion of savings amid rising prices and persistently high interest rates. The commercial real estate sector continues to show signs of stress as well.

The US dollar has also been bolstered by the proliferation of geopolitical risks which boosted safe-haven flows into the American currency. At first glance, with the situation in Ukraine and the Middle East continuing to simmer, investors are unlikely to expect a safer world for now and so the greenback should continue to enjoy inflows. But as the US presidential election campaign heats up, markets may start to focus more on the implications of former president Donald Trump returning to office. His agenda of extremely aggressive trade restrictions, heavy-handed containment measures against China and a less amenable attitude towards long-standing allies will worry investors all over the world. The campaign is also likely to be heated and nasty, further affecting markets' perceptions of risk in the US vis-à-vis the rest of the world.

Beyond these immediate issues, there is a more fundamental question about the US dollar, and that relates to the fiscal position of the US. The International Monetary Fund, among other agencies, has issued warnings about the large US fiscal deficit that is projected to reach 7.1% of GDP in 2025. That figure is more than three times the 2% average of other advanced economies and unprecedented for the US in times of peace and continued economic growth. The American political elite is divided and prefers to avoid discussing a solution to the fiscal challenge. It would not surprise us if the US fiscal position and its huge public debt levels come into greater focus in financial markets as the year progresses.

Asian currencies are backed by robust fundamentals

It is fair to say that Asian policymakers have managed the current turbulence in currency markets reasonably well. Central banks have been quick to show investors that they will do what is necessary to protect their currencies, which is why recent policy decisions have leant towards hawkishness. For example, Bank Indonesia surprised markets with a rate hike that was explicitly tied to its determination to defend the rupiah. The Bank of Thailand has gently rebuffed government pressures to cut interest rates, communicating clearly its reasons for doing so. Other central banks have signalled to investors not to expect premature rate cuts. This adherence to rigorous monetary policy signalled Asian policymakers' commitment to maintaining price stability and controlling inflation, enhancing investor confidence in the region's economic fundamentals.

It also helps that the various metrics of external resilience remain strong — a huge difference from 1997 and 2013. Foreign exchange reserves have been improving in most economies. The reserves-to-debt ratio also remains broadly stable across the region's main economies, providing a cushion against external vulnerabilities. This reassures investors about the economy's stability and resilience.

Finally, the most important measure of external strength — a country's current account balance — has been improving for most economies. Investors will have more reason to expect strong external positions as the recovery in trade proceeds and as tourism receipts increase.

Note that there is more evidence of a strong recovery in the global electronics cycle that will boost Asia's exports. Rising consumer sentiment is bolstering tech purchases, driving an industry recovery which began earlier this year. Similarly, South Korea's exports have enjoyed robust growth, primarily driven by a surge in semiconductor-related product demand. This signals a sustained recovery in the global electronics cycle, emphasising South Korea's pivotal role in driving economic growth and stability in the region.
Adding to this improvement is the recovery in tourism. According to the International Air Transport Association, travel demand in the region rebounded significantly in December 2023, reaching nearly 83% of pre-pandemic levels, compared to just 57% in January that year. The rise in tourism is expected to continue as countries across the region implement measures to attract tourists. For example, South Korea has introduced visa-free travel initiatives, following in the footsteps of other nations like Singapore and China, which have agreed to a 30-day mutual visa-free entry for their citizens since Feb 9. Similarly, Thailand has waived visa requirements for citizens of China and India to stimulate tourism, with plans underway to extend visa-free travel privileges to citizens of more countries. All these are poised to attract more tourists in 2024 and support growth and demand for a country's goods and services.

Overall, Asia's economic performance is likely to satisfy financial markets. Apart from exports and tourism, the region is also poised to enjoy a renewed burst of infrastructure spending by governments as well as foreign investment. Although there remain question marks over China's economy, the most likely outcome is one where the Chinese economy recovers modest momentum. It is also clear that policymakers in China are stepping up measures to ensure that the ambitious 5% growth target for this year is met.

Indeed, the latest set of Purchasing Managers Index (PMI) surveys show that things are beginning to pick up from the trade-induced slowdown of 2023. Several international institutions, most recently the IMF, have affirmed the view that Asian economies are poised for improved growth in 2024 on the back of supportive forces in domestic and external consumption, as well as increased capital spending.

Conclusion

India and Southeast Asia do not get enough credit for the huge improvement in their economic resilience that they have achieved in recent years — something that will help support their currencies. In a world filled with many risks, this is important. There are bound to be shocks from time to time for any economy that is connected to the world economy. The key issue is whether an economy can absorb those potential shocks and bounce back. The region's marked improvement in resilience is clear in how it has faced down a range of shocks such as the sharpest monetary tightening in decades, a series of geopolitical shocks, growing trade protectionism and a Chinese slowdown.

One of the most important sources of resilience for these economies and their currencies is the improved credibility of policymaking. Compared to a decade ago, financial markets are more comfortable with the way the region's central banks conduct monetary policy and how they have maintained independence even when coming under political pressure. Finance ministers have also shown a determination to keep fiscal deficits under control, even at the cost of a slower economy.

The bottom line: the US dollar may well rise further in the coming weeks and put more pressure on Asian currencies. But beyond that near-term risk, there are good grounds for confidence in an eventual rebound in Asia.

Source: The Edge Malaysia

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Cohen

Economic

Forex

It was late 1971 and developing nations had been complaining vehemently about how the US dollar's dominance and appreciation was hurting them. Responding to these complaints, then US treasury secretary John Connally shocked the world when he famously said, "The dollar is our currency, but it's your problem". Such was the hubris. The attitude was quite simply: I lead but you pay! Fast forward to 2024, and more than 50 years later the complaint is exactly the same. Developing countries are being squeezed yet again by a dollar that has risen sharply due to rapid increases in US interest rates. The US Federal Reserve raised its key policy rate from 0.5% to 5.5% within a short period to fight inflation. The elevenfold increase in interest rates caused the greenback to appreciate sharply against just about every other currency and the resulting squeeze led to the current complaints.

Who do we blame for this unchanged state of affairs over the last 50-plus years? US unilateralism in responding to its own needs or policy inaction among developing nations to seriously de-dollarise? Throughout the last 50-plus years, as the dollar's vagaries played havoc with their economies, there has been much hand wringing and talk about the need for developing nations to de-dollarise. But beyond the talk, there has been little action. The much-hyped bilateral payment arrangements cannot effectively de-dollarise as domestic exporters are forced to accept payment in a much less liquid but more volatile currency than the dollar. Thus, exporters would have little motivation to play the bilateral payments game. And so, we end up seeing the same movie again and again.

The dollar's rise this time has not only been rapid but broad based. It is said to have risen against at least two-thirds of the world's 150-plus currencies. It has also risen against all 30 of the most actively traded emerging market currencies. Within Asia, the yen, won, ringgit, Indian rupee, Taiwan dollar and Philippine peso are all at multi-year lows. The yen has fallen 12% over the first four months of this year. The Fed rate hikes began in mid-2022 and having plateaued in August 2023, market expectation was for a decline beginning this year, with a first cut expected in March 2024. Expectation for the inevitable rate cuts was so entrenched that US stocks and bonds were priced to perfection and Asian central bankers did little more than hold their breath, awaiting relief. Unfortunately, inflation just wasn't cooperating. With the US economy, consumption and corporate profits continuing to boom, thanks to the massive post-Covid stimulus, inflation seems nowhere near declining to the Fed's targeted 2%. With US interest rates looking to remain higher for longer, Asian and emerging market currencies are likely to be in the doldrums a lot longer.

For developing countries, a rising US dollar brings a multitude of problems. It alters the nation's terms of trade and increases the price of imports. And if the nation imports foodstuff and other basic items, imported inflation can result. On the export side, with most developing countries being commodity exporters and therefore price takers, they benefit little from a depreciation of the home currency. This asymmetric impact on the trade balance automatically worsens the current account and causes balance of payments problems. For countries with US dollar-based borrowings, the liability and debt burden increases in home currency terms. Further, the capital flight incentivised by the negative interest spread can potentially erode foreign reserves. Thus, a country's fundamentals can deteriorate very quickly and macro-economic vulnerability increases substantially.

So, what can a developing nation do to protect itself? The answer is, not much. The quickest and most effective way to neutralise the situation would be to raise domestic interest rates to match the rise in US rates. Unfortunately, this is not an option as most developing nations, addicted to debt-fuelled growth and pandemic-related expenditure, are now up to their necks in debt. When a domestic economy is highly leveraged, raising interest rates would be excruciatingly painful. Growth gets choked, domestic investments are stifled, consumption is restricted and the household sector is squeezed by higher debt servicing. Unchecked, bad loans rise and banks begin to wobble. Thus, the most effective policy tool, the interest rate option, is just not doable from either an economic or political viewpoint. That leaves central banks with peripheral choices like requiring quicker remittance of export proceeds, placing impediments on outflows and lots of jawboning — pleading, screaming, threatening.

The fact is, there is not much that a developing nation can do unilaterally, but much that can be done collectively. Just as a group of individuals locking hands have a much better chance of making it across a river with strong currents, where an individual cannot, this long-standing problem of US dollar dominance cannot be solved by nations acting alone. Consider the fact that the Philippines, Taiwan and Indonesia had all raised interest rates recently and yet saw their currencies fall further against the dollar. Mighty Japan had both raised rates and intervened heavily, reportedly using up US$59 billion of its reserves within a week, yet the yen sank further. The point is, unilateral action in these circumstances can be hideously expensive and always ineffective in the long run. A more sensible route for developing countries to consider would be a collective Regional Currency Arrangement (RCA).

An RCA would not just help to de-dollarise but offers other benefits like enhanced trade and economic integration, exchange rate stability and reserves management. Where no one currency can now stand up to the dollar's vagaries, a composite regional currency anchored on the combined resources of member countries should be able to offer more resistance. Broadly speaking, RCAs can range from a Common Currency Area (CCA) or currency union with fixed pegs to looser, target zone type arrangements. The eurozone and WAMU (West African Monetary Union) would be examples of the former while the EMS (European Monetary System), forerunner to the euro, is an example of a target zone arrangement. The EMS, established in 1979, enabled the 12 participating countries to reduce inflation, stabilise their currencies and enhance trade and economic integration. Yes, it had its problems but over the 20 years until 1999, it enabled the countries to integrate and evolve into a single currency area. At the heart of the EMS was the European Currency Unit (ECU), which was simply a statistical GDP weighted composite currency. Under the exchange rate mechanism, each participating currency was linked to the ECU at a fixed rate. However, to avoid a fixed peg and the policy restrictions that come with fixed pegs, currencies were allowed to fluctuate within a band. The band, first set at 2.25%, was later raised to 6% and then 15%. The flexible bands enabled participating countries to benefit from the stability afforded by the RCA without sacrificing all their economic sovereignty. Fixed peg, monetary union type arrangements would certainly provide more intra-regional currency stability but the policy restrictions it requires can be debilitating.

It is an RCA with flexible arrangements designed on the EMS target-zone template that Asian developing nations should aim for. There is no reason why Malaysia, Indonesia, Thailand and Vietnam, for example, should not initiate work on an ECU style Asean currency. Despite the flexibility, the policy conformity that such an arrangement requires imposes discipline on participating governments and it is such enforced discipline that gives it credibility and gains the trust of currency markets. An RCA is no quick fix, it has its own set of challenges. However, for nations with little choice but being sitting ducks, it offers a viable long-term solution to better manage their economic destiny. Unless there is serious action towards some collaborative currency arrangement, the complaints over the last 50 years, of the dollar's evils, could likely continue into the next 50.

Source: The Edge Malaysia

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Three years ago, The National reported from a sweltering Baghdad, where millions of Iraqis were struggling through a suffocating heatwave. "It's like Iraq is facing the open doors of hell," Samir Mohammed Khalid said at the time. "We can't stay indoors because of the electricity outages and a lack of drinking water, and we can't go shopping. In both cases, you are being tortured." According to new research published this week, Iraq and many other countries in the Middle East seem set for more of the same.

Scientists from Australia's Monash University, China's Shandong University and the London School of Hygiene and Tropical Medicine found that the Middle East has been hit the hardest by a rise in global heatwave deaths over the past three decades. Lebanon and Syria are among the countries where the rate of excess deaths due to extreme heat has jumped sharply. When these results are viewed in conjunction with other important findings – a report released last August by the international charity Oxfam found that heatwaves in this region will rise by 16 per cent – it is clear that unavoidable change is upon us.

These facts must shake the public and private sectors out of any lingering complacency and dissuade us all of the misapprehension that heatwaves are merely uncomfortable or just periodic problems that affect only limited communities. Instead, heatwaves of increasing intensity and duration present a multifaceted challenge to states, because they exacerbate a range of problems, from water supplies to urban development. Vulnerable people such as children, the sick or the elderly, are particularly affected. Can the Middle East Handle Its Increasing Heatwaves?_1

Can the Middle East Handle Its Increasing Heatwaves?_1

Furthermore, as summer temperatures rise to extreme levels, productivity dips and economic output falls. Heatwaves strain hospitals and emergency services, diverting important resources. Crucially, soaring temperatures hit agriculture significantly, leading to food shortages, price hikes and economic losses.

Extreme heat also damages countries' infrastructure, requiring expensive repairs to avoid disruption to vital transportation and supply chains. As people rely more on air conditioning – if they are lucky enough to have regular electricity – the power grid faces extra pressure and energy prices go up, something that is especially destabilising in lower-income Mena states.

The experts quoted in this latest report have called for "localised adaptation planning and risk management across all government levels". They are right to do so, but how can such action take place in countries such as Lebanon, Yemen or Syria where a lack of effective governance remains a major stumbling block?

And yet, there are reasons to be hopeful. Low-cost solutions to extreme heat exist, such as planting more trees for carbon capture or using heat-reflecting materials and shading. Smart urban planning and building design also offer plausible solutions. An example of this can be seen in Egypt, where green architects ECOnsult designed accommodation for tea farm workers in the country's Western Desert region using traditional knowledge and porous limestone and sandstone that lets air flow through the walls.

But more comprehensive solutions such as developing heat-resistant crops, improving irrigation or increasing electricity capacity to meet the demand for air conditioning all require serious, long-term investment. This is a challenge for national governments, regional bodies and international donors or lenders to address, not in the future, but now. Recognising heatwaves for the security challenge that they are – and not just as a seasonal nuisance – is the first step on that journey.