Economy

KARACHI (Reuters) -Pakistan’s central bank is widely expected to hold its key rate at 22% for the fifth policy meeting in a row on Monday, though an expected easing of inflation could leave the door open for rate cuts in the future, analysts said.The decision is the last under a caretaker government before the country’s general election next month. It also comes in the midst of Pakistan’s $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF). While the rescue programme has helped avert a sovereign debt default, some of its conditions have complicated efforts to curb inflation. Nine out of 10 analysts polled by Reuters predicted the State Bank of Pakistan (SBP) would keep interest rates unchanged on Monday, with one analyst predicting a 50 basis point (bps) cut. “A rate cut is not justified. It will give the wrong signals to the IMF and show that Pakistan is not serious about controlling inflation,” said Ali Farid Khwaja, co-founder of KTrade. Pakistan’s key rate was raised to an all-time high of 22% in June.Sami Tariq, head of research at Pak Kuwait Investment Company, expected the policy rate to be cut by 50 bps because real interest rates are positive on a forward looking basis. Ahead of the IMF bailout, the latest tranche of which was approved on Jan. 11, Pakistan had to undertake a slew of measures, including revising its budget, hiking its benchmark interest rate, and increasing electricity and natural gas prices. The policy rate was raised in an off-cycle meeting in June in a last-gasp attempt to secure funds from the IMF as part of a reform programme aimed at bringing stability to the troubled $350 billion economy.Under the bailout deal, the IMF also required Pakistan to raise $1.34 billion in new taxation to meet fiscal adjustments. The measures fueled record high inflation of 38% year-on-year in May, and it is still hovering above 30%.The measures required by IMF also have dampened business sentiment, with businesses now asking for some respite in the form of a rate cut. “There is mounting pressure on the SBP to start cutting rates, (but) the justification for doing so does not exist, and IMF has cautioned against it, too,” said Khurram Husain, an economic analyst and journalist. Still, some respite could be seen later this year if inflation continues to ease as expected.The Institute of International Finance (IIF), in a country report on Wednesday, flagged that inflation would gradually decline to an average of 24% in the current fiscal year and 14% in fiscal year 2024/25.The report added that while food and fuel inflation will ease this year, the IIF expects a depreciating rupee, rising energy prices, and increased taxes to feed into inflation, partly offsetting gains from falling commodity prices.The rates decision will be the last under caretaker Prime Minister Anwaar ul Haq Kakar, with the country set to go to the polls on Feb. 8. Caretaker governments are usually limited to overseeing elections, but Kakar’s set-up is the most empowered in Pakistan’s history thanks to recent legislation that allows it to make policy decisions on economic matters, though analysts say the central bank itself operates independently. The legislation is aimed at keeping on track the conditions for the bailout secured in June. #. Name/ Organization Expectation 1. Ammar Habib Khan 0 2. Arif Habib Limited 0 3. FRIM Ventures 0 4. JS Capital 0 5. K Trade 0 6. Pak Kuwait Investment Co. -50 7. SCS Trade 0 8. Spectrum Securities 0 9. Topline Securities 0 10. Uzair Younus 0 Median 0 More

HONG KONG (Reuters) – China Evergrande (HK:3333) Group goes back to a Hong Kong court on Monday in a high-profile case to decide whether to liquidate the Chinese property developer that has been at the centre of a spiralling debt crisis in the world’s second-biggest economy.Evergrande, the world’s most indebted developer with more than $300 billion of total liabilities, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021. The low point for the firm deepened a debt crisis in the sector and sparked many other company defaults in a damaging economic blow that to this day remains a drag on growth. A liquidation ruling of the developer which has $240 billion of assets would likely jolt already fragile Chinese capital and property markets. Low investor and consumer confidence remains a major drag on China’s economy, and any fresh hit to markets could further undermine policymakers’ efforts to rejuvenate growth. The liquidation process could be complicated, with potential political considerations, given the many authorities involved.But it is expected to have little impact on the company’s operations including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China – a different jurisdiction from Hong Kong.Evergrande had been working on a $23 billion debt revamp plan with the ad hoc bondholder group for almost two years. Its original plan was scuppered in late September when it said its billionaire founder Hui Ka Yan was under investigation for suspected crimes.The ad hoc group, which was “firmly opposed” to the revised terms proposed by Evergrande in December, plans to join a petition to liquidate Evergrande at the hearing on Monday, which could increase the chances of an immediate liquidation order from the court, Reuters reported last week. The winding-up petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.The winding-up proceedings have been adjourned multiple times and Hong Kong High Court Justice Linda Chan has said previously the December hearing would be the last before a decision was made whether to liquidate Evergrande in the absence of a “concrete” restructuring plan. More

“The logic is simple: stay away from all yuan assets,” said Rain Yang, a retail investor in southern Jiangxi province, who spent last year selling everything but his apartment in order to fund purchases of U.S. stocks, gold and cryptocurrencies.World stocks went up 20% last year, gold rose 13% and bitcoin 155%. China’s blue-chip CSI300 fell 11% and collapsed to a five-year low last week.Promises of official government support have driven a mild bounce this week. But having heard it all before, long-suffering local investors look to be taking the reprieve as a window for escape – leaving a market which is traditionally largely driven by retail money precariously adrift.Since China limits investment abroad under a quota scheme introduced in 2006, the qualified domestic institutional investor programme (QDII) and other official channels are jammed, and banned assets such as bitcoin are booming.There are nearly 400 dollar-denominated wealth management products issued by Chinese banks and their units, according to data from China’s banking regulator, and those are in heavy demand. In January alone, more than 131 outbound products have been issued, quadrupling from a year ago, the China Business News reported.China announced a tripling for individual quotas to access overseas products in Hong Kong and Macau this week, after the wealth connect scheme saw a 12-fold increase in outbound investment last year to 4.9 billion yuan ($682.54 million).Yuan deposit rates are down, reflecting households continue to hoard of cash given the shaky economic outlook.In recent days, flows into China-listed funds tracking foreign markets have also surged far beyond their quota-constrained capacity to invest, sending prices on some funds 30% or 40% above asset values, prompting suspensions and warnings from asset managers and stock exchanges.Investors unable to buy newly-created ETFs from fund managers due to quota restrictions are bidding up the prices in the secondary market.”The premium reflects frictions in the Chinese outbound investment mechanism, when buying exceeds selling,” said Jason Hsu, founder and chief investment officer of Rayliant Global Advisors. Yet investors such as Lu Deyong in the northeastern Liaoning province are undeterred.”There is nothing worth buying in the domestic market,” he said. “Everything is tumbling.”WHERE ELSE?Small investors’ decisions mirror those of big foreign institutions, which have pulled back from China’s markets for months as a much anticipated post-pandemic recovery quickly fizzled and the country’s property sector plunged deeper into crisis.But with retail investors responsible for some 70% of Chinese equity turnover, as per official data, the impact of their desertion is likely to be more lasting.Roughly a dozen retail investors told Reuters lately they either had opened overseas accounts or were looking to do so, citing reasons such as the tumble in property and stocks, a weakening currency, and increasing policy and geopolitical risks.Tech-industry employee Simon Lee has been regularly purchasing gold, China’s premium national liquor Moutai in bottles and U.S. dollars since last year.China’s economy grew 5.2% for 2023, slightly above the government’s target, but the comparison was flattered by a weak, lockdown-hit 2022 and the recovery has been highly uneven. December data published last week showed lacklustre consumption and the fastest fall in home prices for nine years.”None of these problems have shown any signs of improvement,” said Roy Xu, a retail investor in his 20s.These problems will take five to six years to fix, Xu reckons and hence he doesn’t think the market can recover.Morgan Stanley estimates 70 of 80 global emerging market funds they track are either equal or underweight China and like large investors, smaller ones are chasing uptrends in the U.S. and Japan.This week, as markets in the U.S. and Japan made milestone highs, the premium on a China-listed exchange-traded fund (ETF) based on the MSCI USA 50 Index exceeded 40% – a record – and another tracking the Nikkei hit 21%.Premiums also leapt for ETFs that track the S&P 500 Index, the Nasdaq 100 Index and the France CAC40 Index, prompting risk cautions, subscription curbs and trading suspensions from money managers.To be sure, a bigger-than-expected cut in bank reserve requirements announced by the central bank during the week seems to have put a floor under the selling, at least for now. Chinese stocks closed out their best week in six months.Then again, six months ago was when the Politburo pledged to step up policy support and since then the CSI300 has lost 11%.And many analysts say much more stimulus is needed, along with structural reforms, to get the economy and confidence back on track. For now, Yang in Jiangxi province said he’s happy with his hoard of gold coins, bitcoin and half a million yuan in U.S.-tracking ETFs. “If you don’t invest in U.S. stocks, gold and cryptocurrency, where else can you put your money?” ($1 = 7.1791 Chinese yuan renminbi) More

(Reuters) – A look at the day ahead in Asian markets.The big questions for investors in Asia this week are whether the rebound in sentiment towards China is sustained, and whether the Federal Reserve vindicates or cools the growing belief in markets that it will soon start cutting U.S. interest rates. The Fed decision and Chair Jerome Powell’s press conference on Thursday will dominate proceedings, and the biggest market-moving event in Asia is potentially the release of Chinese purchasing managers index data. The regional calendar also includes PMIs from across the continent, fourth-quarter GDP figures from Taiwan, Hong Kong and the Philippines, and the latest inflation figures from Indonesia and South Korea.Asian markets go into the week with their tails up. Bumper U.S. GDP data combined with surprisingly low inflation last week provided further evidence that the world’s largest economy is steering clear of recession and headed for a soft landing. This fueled a bullish burst of ‘risk on’ sentiment globally, while the positive reaction to China’s efforts to support its markets and economy added further local cheer.Beijing’s latest move came on Sunday, with the securities regulator saying it will fully suspend the lending of restricted shares effective from Monday. Figures on Saturday, meanwhile, showed that industrial profits in China are shrinking at their slowest rate since October 2022.China’s CSI 300 index of leading shares snapped a three-week losing streak and rose 2%, the Shanghai Composite jumped 2.75% for its best week since July, and the MSCI Asia ex-Japan index also snapped a three-week losing streak.Japan’s Nikkei 225 bucked the trend and ended lower – its biggest fall in seven weeks – but not before clocking a new 34-year high just shy of 37,000 points. It would not be a total surprise if profit-taking and position-squaring extended into this week.On the data front, China’s PMIs top the bill, providing the first glimpse into how Asia’s largest economy has started the year. The official manufacturing PMI is expected to remain in contractionary territory for a fourth month, according to a Reuters poll, although edging up to 49.3 from 49.0 in December. Manufacturing activity has been shrinking for most of the past year, underscoring the wider economy’s lackluster recovery from the pandemic and doubts over its trajectory.U.S. Treasury Secretary Janet Yellen said on Friday she doesn’t expect major spillovers from China’s economic travails. Beijing has taken steps to inject liquidity into the financial system and shore up the property sector, and markets have responded favorably, at least initially.There are no policy decisions in Asia this week, although the Bank of Japan on Wednesday sheds more light on its thinking when it releases the summary of board members’ opinions from its Jan. 22-23 policy meeting. Here are key developments that could provide more direction to markets on Monday: – New Zealand trade (December)- Singapore business expectations index (Q4)- Euro zone flash GDP estimate (Q4) (By Jamie McGeever; editing by Diane Craft) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is the author of ‘Chip War’, a professor at the Fletcher School, a nonresident senior fellow at the American Enterprise Institute and a partner at GreenmantleOn a recent quarterly earnings call, the chief executive of Semiconductor Manufacturing International Corporation, China’s leading chipmaker, predicted a “global supply glut” in the types of semiconductors his company produces. Simultaneously, he announced a $7.5bn increase in capital expenditure.It may defy business logic but, helped by generous subsidies, China’s chipmakers are ramping up production capacity despite concerns about oversupply. According to one consultancy, the country’s chip production capacity will grow by 60 per cent in the next three years, and could double over the next five. Since western restrictions on the exports of chipmaking equipment to China mean that it can’t produce the most advanced processor chips, much of this production will be of foundational processor chips, which are widely used in cars, household goods and consumer devices.No wonder trade policy officials are getting nervous that China may flood the market in certain types of chips. The chief executive of TSMC, the world-leading Taiwanese chipmaker, recently noted concern over excess capacity in foundational segments. Other chip CEOs privately say the same. The most pessimistic analysts see China’s investment in solar panels as an analogy, worrying that the country’s chipmaking investment will drive down prices — and western companies’ profits.Until recently, overcapacity risk was a topic of conversation only among economic bureaucrats and trade lawyers. Now, it has reached the highest levels of G7 policy debate. On January 8, Republican congressman Mike Gallagher called on the Biden administration to use tariffs if necessary to prevent China gaining “excessive leverage” over the world’s economy.Yet it is not clear which segments might see overcapacity. There are many types of foundational chips, produced in different fabrication plants, with different materials, by different companies. It isn’t guaranteed that Chinese companies will win market share in every sector. For example, the painful pandemic-era shortages have already induced some western automakers to sign long-run supply deals, so they are less likely to buy more from Chinese suppliers even if their prices are lower.Nevertheless, the US, European and Japanese governments are all debating potential responses to Chinese chip overcapacity. They face complex trade-offs. Tariffs are the usual tool for dealing with dumping, but the west doesn’t directly import large volumes of Chinese chips; they’re embedded inside finished devices. Foundational chips often constitute a tiny fraction of a product’s cost. Some companies don’t even know the origin of chips inside their components. Given the administrative complexity of tariffs, officials are exploring alternatives. One approach is to subsidise the use of non-Chinese chips, though this would require governments to find new funds.A second option is to limit the market access of specific Chinese companies. SMIC manufactured the sanctioned Huawei’s controversial 7nm smartphone processor in 2023, and the commerce department is formally investigating whether doing so violated US law. If so, China hawks in Congress will demand tough punishment (though western businesses that still work with SMIC will lobby for leniency).Finally, Chinese chips could simply be banned from “critical” use cases. Intelligence agencies already worry about malicious insertions and compromised chips. Anything from medical devices to electric vehicles might plausibly be considered critical infrastructure.Europeans look at the problem of overcapacity primarily through the lens of trade harm, not security, so they’ll reject any response they consider non-compliant with the rules of the World Trade Organization. China hawks in the US and Japan are more focused on the security implications. They had few concerns around de facto banning Huawei from telecom infrastructure and would follow suit with banning “untrustworthy” Chinese chips from critical sectors too.Yet blanket bans may not be necessary if western companies are deterred from buying Chinese chips. Gallagher has gone public with his concern over China’s subsidies, partly to push the Biden administration to act. But CEOs will also carefully parse Gallagher’s statements. The House of Representatives’ committee has already called executives from several large US chipmakers to testify over their ties to China. As governments ramp up investigations of potential overcapacity in China, companies elsewhere will realise that they, too, could be asked to explain the security implications of their reliance on cut-price Chinese chips.Video: The race for semiconductor supremacy | FT Film    More

In an interview published on Sunday, Finance Minister Mihaly Varga told private news site index.hu that the government will decide next week on its proposal to replace interbank rates with Treasury bill yields as the new, much lower benchmark for corporate and retail loans.The move is part of Prime Minister Viktor Orban’s efforts to revive Hungary’s economy, but its central bank on Thursday criticised it as “misguided”, saying it would reduce the scope for policy manoeuvre.In the interview Varga was quoted saying: “I am confident that by next week we will have a decision that is good for the financial institutions and good for the government as well.” “(The proposal)is a perfectly legitimate point,” he said on the sidelines of a conference which took place on Saturday. “However, the market reaction has shown that the market has not quite understood the purpose of the initiative.”A surge in inflation last year to 25%, the highest in the European Union, pushed Hungary’s economy into recession, and while growth is expected to resume in 2024, a Reuters poll this week suggested it would miss the government’s 3.6% forecast.S&P Global financial institutions analyst Lukas Freund told Reuters earlier this week the proposal represented another example of Budapest’s unconventional policy, which aimed to boost the economy but posed a risk to the financial sector.The government responded last week to the central bank criticism by saying the bank had mishandled the root cause of the problem after the spread between the Budapest Interbank Offered Rate (BUBOR) and Treasury bill yields widened to around 250 basis points. More