Sat, Jan 24, 2015 page15

• Asia under pressure from weak growth, disinflation

  STIMULUS MEASURES: The region’s major economies face fresh calls for interest-rate cuts as manufacturing sputters, prices fall and the specter of deflation rises

  • Reuters, BEIJING and SEOUL
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  Chinese factories were forced to cut prices for the sixth straight month this month to sell their products, while economic growth in South Korea slowed sharply, raising the prospect of more policy easing from major central banks in Asia.

  The weak manufacturing gauge from China added to expectations that Beijing will have to announce fresh stimulus measures soon, and came a day after the European Central Bank (ECB) took the ultimate leap and launched a huge bond-buying program as it tries to stave off deflation and kick-start growth.

  China’s manufacturing growth stalled for the second month in a row, the HSBC/Markit flash manufacturing purchasing managers’ index (PMI) survey showed yesterday.

  

  A girl reads a book on her balcony as smoke rises from chimneys of a steel plant, on a hazy day in Quzhou, Zhejiang Province, China, on April 3 last year.

  Photo: Reuters

  The PMI hovered at 49.8 this month, little changed from last month’s 49.6 and just below the 50-point mark that separates contraction from growth.

  Reflecting the tumble in oil prices, which have more than halved in the past six months, a sub-index for input prices sank to 39.9, a level not seen since the global financial crisis.

  However, companies also had to cut output prices for the sixth straight month to sell their products, and more deeply than last month, eroding their profit margins.

  “Today’s data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand,” said Qu Hongbin (屈宏斌), an HSBC economist in Hong Kong. “More monetary and fiscal easing measures will be needed to support growth in the coming months.”

  Falling prices are a concern for China, which wants to avoid Japan’s fate of sinking into a 20-year deflationary funk that has depressed consumption and economic growth.

  Analysts at Nomura saw more downside pressure on China’s producer prices, “enhancing our concerns over deflation.”

  “This looks like a trend and it will affect core inflation at some stage. So the PBOC [People’s Bank of China] will very likely react to such deflation concerns,” Nomura Holdings Inc economist Hua Changchun (花長春) said, adding that he expected the central bank to cut commercial banks’ reserve requirement ratio in the first quarter to free up more money to lend.

  News out of South Korea made for uncomfortable reading as well. Asia’s fourth-largest economy grew a seasonally adjusted 0.4 percent in the October-December period from the previous quarter, less than half of the 0.9 percent gain in the third quarter.

  A senior statistics official from the central bank pointed to the uncertainty facing the trade-reliant economy, not least from the slowdown in China, South Korea’s biggest export market.

  Although the Bank of Korea has downplayed the risk of deflation, analysts say the central bank is overly optimistic about the economic outlook and are predicting another rate cut to recharge a faltering recovery. Inflation dipped to 0.8 percent last month, the lowest in more than 15 years.

  “If [the ECB move] leads to further easing in South Korea as well, it would boost the economy here, too,” HI Investment and Securities fixed-income analyst Seo Hyang-mi said.

  She expects the Bank of Korea to deliver a cut by April.

  In Bangkok, Thailand’s finance minister urged the central bank to cut rates to help the sputtering economy and said he was worried that the strength of the baht would hurt exports, a key growth engine.

  In Australia, investors now see a bigger chance of a cut after surprise easing from Canada earlier this week, while India last week cut rates earlier than expected and hinted at more to come.

  The lone bright spot in Asia was Japan, where producers saw a pick up in domestic and overseas orders this month and hired more staff.

  Still, the Bank of Japan (BOJ) is struggling to reach its ambitious 2 percent inflation target after it slashed its inflation forecasts earlier this week. While the Japanese central bank signaled it was in no hurry to add to its massive asset-buying scheme, some analysts suspect it will have to do more later in the year.

  “With very low inflation, or even negative inflation and some slack remaining, we expect that advanced economy monetary policy will continue to loosen overall,” analysts at Citi wrote in a note to clients.

  “ECB QE [quantitative easing] will probably be scaled up further over time. We also expect the BOJ to expand QE further around mid-year,” they wrote.
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