Sunday, August 9, 2015

Deflation pressures for China; For Singapore, success and challenges at 50; HSBC as world's ex-local bank

1 Deflation pressures for China (Straits Times) Producer prices in China fell to a near six-year low last month while consumer inflation remained subdued, signalling the world's second-largest economy was still facing deflationary pressures and that Beijing has room to further support the sluggish economy.

The producer price index (PPI) fell 5.4 per cent from a year earlier, compared with an expected 5 per cent decline. It was the worst reading since October 2009 and the 40th straight month of price falls. The index, which tracks the factory-gate selling prices of firms, pointed to persistent weakness in commodity prices and soft demand in China's economy, which are eroding company profits.

An official factory survey last week showed deteriorating conditions forced companies to cut staffing for the 21st straight month, and manufacturers had to reduce selling prices to a six-month low due to increasing competition. In line with sluggishness in the broader economy, annual consumer inflation stayed muted at 1.6 per cent, slightly higher than a 1.5 per cent estimate, and up from June's 1.4 per cent.

The data showed pork price inflation was most buoyant last month, with prices surging 16.7 per cent due to a sharp fall in hog supplies. Pork prices are an important component of China's consumer price index basket - the weighting of which is a secret - though some economists estimate that food accounts for as much as 30 per cent of the index.

HSBC said in a recent research note that it still expects another 25- basis-point (bps) interest rate cut in the second half of this year, and a 200-bps cut in banks' required reserve ratio (RRR). The central bank has already cut interest rates four times since November and lowered the RRR for big banks by 150 bps.

2 For Singapore, success and challenges at 50 (San Francisco Chronicle) Singapore threw a big party Sunday for its 50th anniversary of independence and unrivaled economic success in a region struggling with poverty and political instability, even as the city-state began feeling the pinch of a midlife crisis.

While marveling at the island's leap from a poor colonial port to a wealthy metropolis, Singaporeans are also grappling with a growing resentment over political restrictions, an influx of foreign labor and a rising cost of living.

Lee Kuan Yew, who died in March at age 91, and was prime minister for more than three decades, had no tolerance for political dissent. Opposition figures were either defeated in elections or taken to court on defamation charges until they were bankrupt. The country's laws prohibit bankrupts from contesting elections.

His son, current Prime Minister Lee Hsien Loong, is now steering Singapore with similar restrictions, and is facing a general election expected to be held Sept. 12. The ruling People's Action Party, which holds 80 of 87 parliamentary seats, suffered its worst results in 2011 elections. Most mainstream media are controlled by government-linked companies, and the few independent news websites that exist are wary of strict defamation laws.

Reporters Without Borders' 2015 World Press Freedom Index ranked Singapore 153rd of 180 countries, below Gambia and the Democratic Republic of Congo. When the population boomed to over 2 million in the 1970s from 1.89 million at independence, Lee vigorously campaigned for women to stop at two children. He also carved a place for a second language in the English-medium education system to make Singaporeans more marketable.

But as Singaporeans grew more educated and wealthy, wages rose, and the ruling party looked to the rest of Southeast Asia for blue-collared manpower to keep the wheels turning. Today, Singapore is among the five most expensive cities in the world.

3 HSBC as world’s ex-local bank (Matein Khalid in Khaleej Times) The world's local bank just got mauled by July's bloodbath in Shanghai, Shenzhen and Hong Kong. While first-half 2015 profit was up 10 per cent, the stock market is still concerned about the slump in emerging markets exports and currencies. Even though HSBC pretax profits for the first half of 2015 was $13.6 billion, the bank is exposed to economic slowdowns in China, Hong Kong, Southeast Asia, Europe, the Middle East and Sub-Saharan Africa's oil/metal exporters.

HSBC intends to slash 50,000 jobs worldwide and "pivot" to its Asian roots, since the bank generates two thirds of its revenues from the Pacific Basin. Now that HSBC is selling Demirbank, its Turkish subsidiary, after catastrophic losses in consumer banking credit cards, the message is clear: Britain's largest listed bank is no longer the world's local bank, if local markets do not cover their cost of allocated capital.

The bank plans to slash $290 billion in risk-weighted assets from its global balance sheet, mostly from global banking and markets, or GBM, 33 per cent of group revenues. This basically means cutbacks in capital intensive structured products and complex derivatives trading businesses worldwide.

HSBC's capital, liquidity and efficiency ratios are stellar. The Basel Tier One capital ratio is 12 per cent. The loan/deposit ratio is 72. The cost income ratio is 60. Its valuation metrics are modest at 10.8 times forward earnings and 0.84 times price/book value. The dividend yield is five to six per cent, among the most attractive in global banking.

HSBC has been in restructuring mode since 2011 but the urgency increased once pretax profits fell 17 per cent in 2014 and the bank's Swiss private banking subsidiary was ensnared in a money laundering probe.

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