Regional roundup: Finance in East Asia – Jan. 16

Unfortunately, we start this roundup as we did the last – with more economic bad news. Exports dropped 2.8 percent and imports declined 21 percent in China on annualized basis in December. Also, China reported the first slowdown in growth of its foreign reserves since 1998, although reserves still rose by $45 billion in the fourth quarter of last year to about $1.95 trillion. Debate is also now swirling about rate of China’s economic growth for 2009, and even the central bank governor now is publicly setting expectations that the target rate of 8 percent may not be achievable.

Korean exports showed a decline of 17.4 percent in December, along with the fifth straight month of decline in industrial production. Finally, surveys of consumer confidence, business sentiment, and manufacturers across the region continue to show significant declines. Again, in China, new surveys showed that over 50 percent of consumers intend to save more and spend less in the coming year, which indicates that domestic demand may not be a way out for Chinese growth.

Banking problems are now increasingly expected to begin emerging across East Asia. Fitch just released a report that Chinese banks’ expected losses are mounting and projected that the loan losses would be 6 percent or more by end-2009. However, this was hedged by stating that “there are concerns with weaknesses in the banks' loan classification, the rise in hidden credit risk, and uncertainties about the reliability of collateral and guarantees, which may be contributing to widespread under-capturing of Chinese banks' credit risk exposure.” The Chairman of the banking regulator, the China Banking Regulatory Commission, stated that there will be a “reasonable tolerance” for rising bad loans in the banking system this year. Also, the various announcements by governments to push commercial banks into supportive lending may also result in additional problems.

As I highlighted last week, the announced $586 billion economic stimulus plan was only 30 percent funded from the central government and the expectation was the much of the rest was to come from state-owned banks. News reports now already indicate that the banks have already extended $108 billion in new loans in December, which is the most since January and comes at a time when all economic and corporate indicators are down. In Thailand, the Bank for Agriculture and Agricultural Cooperatives established a $289 million subsidized lending program for the unemployed as part of an initiative of the Government.

More interest rate cuts have taken place across the region. The most recent of which was in Korea, which reduced its benchmark interest rate by 50 basis points to 2.5 percent. This was the fifth rate cut for a cumulative cut of 275 basis points. The Bank of Thailand cut the key benchmark interest rate by 75 basis points, which was more than most analysts expected. 

Also, fiscal stimulus plans are still coming out of the region. Thailand announced an $8.6 billion stimulus plan to boost domestic demand. Although one news report noted that this amount is the equivalent to the tourist revenue lost in the eight day seizure of the airport in November by the opposition political party. Indonesia’s $5.5 billion stimulus plan appears to now include more subsidies in the areas of electricity and diesel fuel, as well as tax cuts for certain industries.

After a brief start on the upside, the emerging market stock exchanges are once again down – 8.3 percent on average for the year so far. Korea, China, Taiwan, and Thailand have been the loss leaders with 9.7 percent, 9.5 percent, 8 percent, and 7 percent decreases respectively.

Let’s hope for some better news in the next regional roundup, but I’m not betting on it!