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Asia Update

** China: Stronger than expected March PMI readings
** China: S&P downgrades outlook to negative from stable; affirms AA- rating
** China: PBoC discloses derivatives holding positions for the first time
** China: MSCI resumes discussion on A-shares inclusion
** Hong Kong: S&P downgrades outlook to negative from stable; affirms AAA rating
** Thailand: BoT shifts to a dovish stance
** Indonesia: Firmer March inflation seen but still within BI’s 3-5% target range

China: March PMI manufacturing released this morning was much stronger than expected at 50.2 (consensus: 49.4) from 49.0 previously. This is the first reading above 50 in eight months, since July-2015. The segments that posted the largest gains were 1) new orders at 51.4 (February: 48.6); 2) new export orders at 50.2 (February: 47.4); and 3) output at 52.3 (February: 50.2). The employment component remained soft albeit higher at 48.1 (February: 47.6). Inventories of raw materials remained weak at 48.2 (February: 48.0) reflecting the overcapacity situation. The services PMI was also firmer at 53.8 from 52.7 in February. The private sector Caixin PMI manufacturing reading was also stronger than expected at 49.7 (consensus: 48.3) from 48.0 previously. Seasonal factors may have contributed to strong the rebound, as seen in March 2011 and 2012. There may be signs of stabilization but it is probably too early to say it’s the start of a sustained rebound.

S&P yesterday downgraded China’s sovereign rating outlook to negative from stable, while affirming its AA-rating. This was not entirely surprisingly given Moody’s lowered the outlook to negative in early March. The key reasons boil down to i) weakening fiscal metrics due to rising debt, for both government and corporates; ii) increasing vulnerability due to falling FX reserves on capital outflows; and iii) uncertainties over the progress on reforms;

PBoC for the first time disclosed its short foreign-currency positions in forwards and futures. As of end-February, it held USD28.9bn of such positions with commercial lenders and USD2.4bn worth of total long positions. The disclosure follows ongoing speculations that PBoC intervened in the forward market to support CNY in recent months. If anything, the numbers were probably lower than expected. The disclosure is also another step towards greater transparency;

Hong Kong: In a similar move, S&P downgraded Hong Kong’s sovereign rating to negative from stable, while affirming its AAA rating. This mirrors the outlook change for China given the close linkage between the two economies. On a more positive note, it said that Hong Kong’s sizable fiscal reserves, strong external position and above-average economic growth are supportive factors for the existing rating. It did however warn that Hong Kong’s rating could be downgraded irrespective of developments in China should the political polarization worsen to a point that it compromises the business and policymaking environment.

South/Southeast Asia: MACINTOSH H 2:Users:willtombs:Desktop:Screen Shot 2015-01-06 at 17.06.31.png

Thailand: Bank of Thailand (BoT) Assistant Governor Jaturong Jantarangs said yesterday that the central bank may cut its policy rate if the global economy worsens.

The last time it cut rates was back in H1 2015 by a combined 50bp. BoT is shifting to a move dovish stance in light of deeper growth concern and delays in the next Fed hike.

For USD-THB, it declined by 0.14% yesterday to close at 35.19.

Indonesia: We get March’s inflation later. Headline inflation is expected to pick up to around 4.5% y/y vs 4.3% previously on higher food prices.

Core inflation which excludes volatile food and administered prices is expected to remain stable at 3.6%.

For USD-IDR, it held steady yesterday to close at 13,260.

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