Asia: Still Firing

It's been a week where the contrasts between the weak economies of Europe and the US have again been underlined (to Australia's benefit) by confidence-sapping financial problems.

In contrast to weak Europe and befuddled America, the still strong economies of Asia seem to be on the turn as inflation fears ease.

Interest rates were left untouched in Australia and South Korea this week. (And also in the UK and in Canada and the eurozone).

In fact the European Central Bank downgrade its growth and inflation forecasts, holding out the hope that it will reverse one of its two recent strange rate rises later this year.

And a key international economic group cut its forecast for global economic growth for the rest of this year and into 2012, but Australia and Asia will remain sold (See next story).

But the Swiss National Bank made a dramatic move and pegged the franc to the euro at a rate of 1.20, which means Switzerland has had enough of the strengthening currency wreaking havoc on the economy.

Japan immediately rejected such a move as a way of handling the strong yen, which will now come under further pressure from money looking for a safe haven.

The Australian dollar will also be sought by global investors because they can at least get a decent interest rate here.

The reports from central banks though suggest that while the various remain solid, (although inflation is a drawback in South Korea and Australia), fears about the eurozone and the faltering US economy were central to the decisions not to move rates.

The NZ Reserve Bank meets next week and is not expected to move rates either, but there are now suggestions there could be a small change in China to the high levels of asset reserve ratios that major banks have to maintain.

It could come next week, which would be a signal that the Chinese authorities think they have done enough to control inflation and can start relaxing the current tight monetary policy.

If that happens, it could spark a rally in Asian markets.

In fact that Asian growth remains intact and that's bullish for Australia as the problems in Europe and the US confront us.

Asia is our biggest market for exports and a major source of investment, tourism and imports.

But 2012 is emerging as a bit of a worry as there are growing forecasts of a further slowing in China.

China, Japan and South Korea are our three major trading partners.

All are experiencing solid growth, but like Australia, are worried about what's happening in Europe especially.

China reports its complement of August economic data later today.

Industrial production should be solid.

Already we have seen a small rise in car sales for August, after July was weak, and it seems the country's inflation rate may be about to start easing, if the usual leaks ahead of the data's release are any guide.

Sales of passenger cars in China rose 5.1% in August from a year to 900,000 units, according to the China Passenger Car Association.

That was also up a solid 7.2% from July.

In the first eight months, passenger car sales totalled 7.23 million units, up 8.7% on the first eight months of 2010.

Inflation remains the bugbear and forecasts are for a fall from the 6.5% rate in the year to July to a range of 6% to 6.3% for August.

China this week revised up its 2010 GDP rise to 10.4% because of revisions and a re-examination of data.

Xinhua and China Daily reported that China's 2010 GDP now stands at 40.12 trillion Yuan ($US6.27 trillion), up 321.9 billion Yuan from the previous figure released in February.

The National Bureau of Statistics reported that the gain came from secondary industries and the country's service sector.

This was the second revision of the 2010 GDP growth figures.

At the same time reports have appeared of a warning from a senior economist this week that the Chinese economy could slow more sharply than though in 2012.

Media reports said Huang Guobo, chief economist at the State Administration of Foreign Exchange, (which looks after Chinese huge foreign reserves) says growth could fall below 9% because of the problems in Europe and the US.

The report quoted him as saying at a forum in Beijing that the deteriorating sovereign debt crisis in some large economies reduced worldwide market confidence, which will challenge China's economy.

China's economy grew at an annual rate of 9.5% in the June quarter, down from 10.4% last year and 9.7% rate in the first quarter of 2011.

UBS has cut its forecast of China's GDP growth from 9.3% to 9% for this year and to 8.3% (from 9%) for 2012.

Other media reports this week said Wang Jian, an economist affiliated with China's National Development and Reform Commission, (and said to known for relatively bearish views), told local Chinese media at the weekend that China's growth could fall below 8% in the first half of 2012.

The last sub 9% expansion was in 2001, when GDP rose by 8.3%.

But the crucial media report this week has been the 21st Century Business Herald story suggesting that the People's Bank of China may stop asking some banks to set aside additional reserves.

The last round of the differentiated reserve ratio rule expires next week on Thursday (September 15), a move that would see tens of billions in liquidity injected into the economy at a time when credit is reportedly hard to come buy and local money market interest rates remain high.

The reserve ratio of several banks, including Bank of China,, Bank of Communications Co. and China Everbright Bank Co., is half a percentage point higher than that of other banks since last November.

The symbolism of such a move would be greater than the financial impact.

Meanwhile the Bank of Japan sat on its hands this week and did nothing as more data emerged that the economy is still growing from the March disasters.

Another reason for doing nothing was the newness of the government of Prime Minister Noda.

Japan's current account surplus fell 42.4% from a year earlier in July, as the goods and services balance fell into a deficit, the Ministry of Finance said yesterday.

The surplus in the current account, the broadest measure of Japan's trade with the rest of the world, stood at Y990.2 billion in July before seasonal adjustment, ministry data showed.

The fall is understandable: it is fifth consecutive drop in the aftermath of the March 11 earthquake and tsunami.

In June, the surplus was down 50.2% to Y526.9 billion, so it's improving slowly.

Japan's exports fell by 2.3% from a year earlier in July, while imports gained by 13.6%.

And Japan's foreign exchange reserves rose to a record high last month, the result of massive official intervention in the currency market to counter the yen's sharp rise.

The Finance Ministry says as of the end of August foreign reserves amounted to more than $US1.2 trillion.

That's up about US68 billion from the previous high in July.

Japan's monetary authorities in August had sold a record 4.51 trillion yen, or $US58 billion, in one day in August to try and cap the rise in the yen.

The surge in global gold prices and higher prices for foreign government bonds (especially the US) were also factors in the rise.

And finally, South Korea's central bank left its key interest rate at 3.25% yesterday.

The move means the 7-day repo rate will be unchanged for a third straight month.

The Bank of Korea (BOK) decision had been widely expected.

The Bank has boosted rates by 1.25% since July last year. The bank raised the key rate in January, March and June this year as inflation has risen, thanks to higher oil and commodity prices.

South Korea's economic growth was revised up to 0.9% in the June quarter this week. It was initially reported at a rise of 0.8%.

Second-quarter growth slowed from a 1.3% rate in the March quarter.