1. Research Analysts:
Jethro Hee,
Khong Zhan Qing,
Timmy Lim
GLOBAL MACRO DEPARTMENT
EAST ASIA REGIONAL MARKET REPORT

2. Global Macro Department
East Asia
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Contents
Contents ..................................................................................................................................................1
Abstract...................................................................................................................................................2
China.......................................................................................................................................................3
Economy in Brief................................................................................................................................3
News & Events ...................................................................................................................................4
Slowing Down of the Chinese Economy ........................................................................................4
China Ends its One-Child Policy Scheme.......................................................................................4
China Continues to Devalue its Currency.......................................................................................5
China joins IMF currency basket....................................................................................................5
Key Forecasts......................................................................................................................................6
References...........................................................................................................................................6
Hong Kong..............................................................................................................................................8
Economy in Brief................................................................................................................................8
News & Events ...................................................................................................................................8
Hong Kong raises base rate for 1st time in 9 years.........................................................................8
Property prices reach a possible turning point................................................................................9
Key Forecasts......................................................................................................................................9
References.........................................................................................................................................10
Japan .....................................................................................................................................................11
Economy in Brief..............................................................................................................................11
News & Events .................................................................................................................................11
Abenomics ....................................................................................................................................11
Structural Reforms........................................................................................................................11
Trans-Pacific Partnership (TPP) ...................................................................................................11
Key Forecasts....................................................................................................................................13

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Abstract
East Asia is an economy supported by over 1.5 billion people – over one fifth of the world’s population.
Its constituent countries are present at various stages of economic development such as Japan with the
highest nominal GDP per capital of over 40,000 U.S. dollar in the region to North Korea with that of
only less than 600 U.S. dollar. In 2015, the world had witnessed several major events taking place in
the region, e.g. stock market crash in China – the world’s second largest economy. As such, this report
seeks to critically analyse the regional outlook of East Asia with its main focus on China, Japan and
Hong Kong using macroeconomic theories and with reference to recent news and events.

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China
Economy in Brief
Since opening up to foreign trade and investment and implementing free market reforms in 1979, China
has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP)
growth averaging nearly 10%. It has emerged as the 2nd
largest economy in the world, right behind U.S
and is the world’s largest manufacturer according to the United Nations.
However, it was previously warned that the model underlying China’s rapid growth is unsustainable.
And it now looks like the year 2015 is the time at which the unsustainable trend has finally come to an
end. China experienced a 6.9% growth rate for the third quarter in 2015—dipping below 7% for the
first time since 2009. Additionally, China had experienced a stock market crash in the middle of the
2015.
With the Shanghai Stock Exchange Composite Index (SHCOMP) being at its peak on June 12, it fell to
2,927 from 5,166.3 within 2 months — a 43.3 percent decline.
Figure 1: Shanghai Stock Exchange Composite Index (SHCOMP)

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News & Events
Slowing Down of the Chinese Economy
As shown in Figure 2, in view of the 2008 Financial Crisis, the Chinese government had implemented
a large economic stimulus package and an expansive monetary policy. These measures boosted
domestic investment and consumption and allowed China to exit the financial crisis in good shape, with
GDP growing above 9%, low inflation and a sound fiscal position.
However, the policies implemented during the crisis to foster economic growth exacerbated the
country’s macroeconomic imbalances. Particularly, the stimulus program bolstered investment, while
households’ consumption remained repressed. This economic model of depending greatly on
investment for economic growth has resulted in the slowing down of its economy, as it will come to a
point where there will be few or no things to invest in in the country.
This event has caused serious concern to the world as the slowdown of China’s economy may
potentially weaken the economies of the rest of the world, and result in negative effects such as a loss
of confidence in the stock market and all other financial markets.
China Ends its One-Child Policy Scheme
In an effort to shift China’s economic model from an investment-driven economy to a more
domestically-focused consumption economy, the China government has scrapped its one-child policy
after implementing it for 35 years. This move seeks to tackle the aging population and promote a
balanced development by providing a massive boost to consumer spending and investment at a time of
economic slowdown.
With more than 100 million people of child-bearing age affected by the change, China could see
between 2.5 million and 8 million extra births a year from 2017. The economy could expect a
consumption boost of some 75 billion Yuan (around $12 billion) annually, and the change could also
bring as much as $35 billion in annual investment in sectors including education and housing. This
would then help in tackling China’s economic slowdown.
Figure 2: China’s Annual Real GDP Growth Rate

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China Continues to Devalue its Currency
People’s Bank of China (PBOC) surprised markets in the month of August with three consecutive
devaluations of the Yuan, knocking over 3% off its value. The move sent fresh shockwaves through
global markets, pushing shares sharply lower and sending commodity prices further into reverse, as
traders feared the move could also ignite a currency war that would destabilise the world economy.
As seen in Figure 3, on 11 Aug 2015, prices for USDCNH rose significantly within a single day, from
6.21360 to its day close of 6.38369 - a 2.78% increase in prices which marked as the largest single drop
of the price of Yuan in 20 years.
Many interpret the devaluation as a desperate attempt to stimulate China's sluggish economy and keep
exports from falling further. As U.S politicians have been claiming for years that China has kept
its currency artificially low at the expense of American exporters, this may lead to increasing trade
tensions that can result in negative implications for the world’s economies.
The PBOC sought to reassure financial markets that this was not a deliberate attempt to drive down its
value by embarking on a steady depreciation. Rather, the movement of the currency was a result of a
project to liberalise its management as part of the government’s commitment in reforming China’s
economy to a more market-oriented direction.
China joins IMF currency basket
In November, the International Monetary Fund’s executive board decided to include the Chinese
Yuan—also known as the renminbi—in its Special Drawing Rights (SDR) basket. This reflects the
rising importance of the world's second-largest economy.
Though the SDR has no direct link to financial markets or private businesses, with such a move, over
time, central banks might be prompted to hold more reserves in Yuan and that might encourage more
use of Yuan for trade and investment, which in turn might drive China’s economy.
However, that is just one prediction. On the other hand, detractors believe the Yuan’s inclusion in the
SDR basket will not significantly increase central-bank demand for Yuan as it will be limited by
continued Chinese government controls over the currency and the Yuan-denominated debt.
Figure 3: U.S Dollar against Chinese Yuan Price Chart
11 Aug: 1st Devaluation of Yuan

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Key Forecasts
With respect to the abolition of the one-child policy, it is unlikely that there will be a strong short term
impact on the economy as this move requires time for the size of the working force to increase. Hence
it is targeted at longer term demographic shifts in China, looking at the long term impact on the
economy.
However, pertaining to the strength of its long term impact, it may not be a strong one as well. According
to a survey cited by Capital Economics, many couples may not even want to have more children despite
such a move as they might choose to spend their rising wealth on a better standard of living. Other
lifestyle concerns, such as heavy pollution and political uncertainty may also act as a deterrent to having
more kids.
Additionally, pertaining to the recent devaluation of the Yuan, it appears that China is indeed not
deliberately attempting to drive down the Yuan.
This is so as China has a good reason for the recent devaluation of the Yuan. With slower growth in
China and a strengthening US dollar, allowing the Yuan to depreciate is in line with market
fundamentals. Regardless of the fact that China’s exports may get a boost from the depreciating Yuan,
the move is consistent with the Chinese government’s commitment to let the market play a greater role
in determining economic outcomes.
Furthermore, it is forecasted that China will have minimal or no manipulation of its exchange-rate in
the near term. This is due to the fact that Chinese leaders want to be seen as reliable especially after
having the Yuan included in the IMF currency basket. This will also encourage China to adopt more
measures toward accelerating the process of the opening of its foreign exchange and capital markets.
Overall, the problem of China experiencing a slowing down of its economy is due to the over reliance
of investments. To curb such a problem and to allow for sustainable growth, China has to switch over
to a more conventional consumption-based growth model, being more focused on wage increases,
productivity, and efficiency. This makes sense for China as it is the world's biggest market of
consumers.
With the implementation of China’s government initiatives such as the abolishment of its one-child
policy and the inclusion of the Yuan in the IMF currency basket, it aids in transforming China into a
more conventional consumption-based growth model. However, such initiatives still have its limitations
as mentioned above.
In conclusion, it is forecasted that in the short term, China’s economy will see a moderate decrease in
its GDP annual growth rate. For its currency, the Yuan, together with its stock market, will remain in
the 6.46 to 6.7 region and 3380 to 3490 region respectively. In the long term, China is forecasted to
achieve sustainable growth in its economy if its government continues to implement measures that
addresses issues like productivity, consumer spending, and welfare-typed provisions.
References
Adinolfi, J. (2015). What you need to know about China’s inclusion in IMF currency
basket.MarketWatch. Retrieved 19 December 2015, from http://www.marketwatch.com/story/what-
you-need-to-know-about-chinas-inclusion-in-imf-currency-basket-2015-11-30
Asian Development Bank,. (2014). People’s Republic of China: Economy. Retrieved 19 December
2015, from http://www.adb.org/countries/prc/economy
International Business Times,. (2015). China Scraps One-Child Policy To Stimulate Consumption And
Investment During Economic Slowdown. Retrieved 19 December 2015, from
http://www.ibtimes.com/china-scraps-one-child-policy-stimulate-consumption-investment-during-
economic-2162046

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Lee, T. (2015). China's stock market crash, explained in charts. Vox. Retrieved 19 December 2015,
from http://www.vox.com/2015/7/8/8911519/china-stock-market-charts/in/8969854
Tradingeconomics.com,. (2015). China | Economic Forecasts | 2016-2020 Outlook. Retrieved 19
December 2015, from http://www.tradingeconomics.com/china/forecast
Tradingview.com,. (2015). USDCNH: Unnamed - TradingView. Retrieved 19 December 2015, from
https://www.tradingview.com/chart/u1cYOAnZ/
Yglesias, M. (2015). China's economic slowdown: 11 things you should know. Vox. Retrieved 19
December 2015, from http://www.vox.com/2015/9/3/9251775/chinas-economic-slowdown

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Hong Kong
Economy in Brief
Hong Kong managed to achieve modest year-on-year real economic growth of 2.3% in the 3rd
quarter
of 2015, despite the slowdown in the China economy, which is the largest entrepot for Hong Kong.
Even though the economy had slowed down, unemployment still remained relatively low at 3.3%.
Domestic consumption has been the main driver of growth in recent years, expanding by 4.3% year-on-
year in the 3rd
quarter of 2015.
In 2015, the Hong Kong stock exchange was the world’s largest IPO market in terms of funds raised,
cementing its position as one of the top financial hubs in the world.
News & Events
Hong Kong raises base rate for 1st time in 9 years
In response to the Fed interest rate hike, Hong Kong raised its base rate from 0.5 per cent to 0.75 per
cent for the first time in 9 years. The Hong Kong Dollar is pegged to the US dollar, hence its monetary
policy closely follows that of the US.
Figure 4. Impact of hike in base rate on Hang Seng Index
Following the hike, the Hang Seng index rose by nearly 1% after a continuous decline over the past 10
days.
The hike in base rate by the Hong Kong government has brought about renewed interest to HKD’s peg
against the US dollar.
Earlier in August when the yuan devaluation took place, many currencies around the region depreciated.
The Hong Kong dollar, in contrast, saw a surge in demand, which was a reflection of the demand for
safe-haven assets, since the peg to the US dollar guarantees some form of stability. However, this
increase in demand for Hong Kong dollar did not spell well for its economy. At a time when its
neighbouring economies were experiencing depreciation in their currencies, Hong Kong’s export
competitiveness was adversely affected. Coupled with the slowing Chinese economy, this could

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possibly explain the decline in merchandise exports by 1.7% from January to October 2015, in contrast
to the 3.2% increase in 2014.
Because of the closer integration with the Chinese economy, the slowing Chinese economy is also going
to affect Hong Kong more than ever before. This leads to what Mole Hau, a Hong Kong based
economist calls a ‘double whammy’ situation. On one hand, the Hong Kong economy is being slowed
down by the Chinese economy. On the other, as an indirect consequence of the peg to the US dollar,
the hike in base rate following the Fed is likely to further worsen the economy and depress wages and
property prices, which generates more unhappiness against the peg.
Despite the economic conundrum that Hong Kong is in, it is likely that the peg to the US dollar is here
to stay for now, because any changes to the current system may invite speculation and affect the
integrity of the financial system, in what has already been a very volatile year for the economy.
Property prices reach a possible turning point
After a peak in property prices in 2014, where median property prices soared to almost 17 times the
median household income, prices have started to decline in the later part of 2015, and are expected to
drop gradually by about 10% next year.
The fall in property prices is contributed by both external and internal factors. Externally, a slowdown
in China could mean a reduced demand for properties in Hong Kong. The increase in base rate from
0.5% to 0.75% by the Hong Kong government could also reduce the demand for properties given that
this could mean higher mortgage rates, especially since a large proportion of mortgages in Hong Kong
involve adjustable rates. Internally, the Hong Kong government has committed to increase the housing
supply by making available more land for housing and commercial development.
Despite the fall in prices in the physical property market, Hong Kong property stocks have not been so
adversely affected. Although the Hang Seng index experienced an overall fall of 9.1% since 2014, the
Hang Seng Properties Sub-index has actually increased by 1.42% during the same time period,
cushioning the drastic fall in energy and consumers goods and services.
Key Forecasts
Figure 5: Hang Seng Index

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The Hang Seng Index has been on a downtrend for the later half of this year. After a minor correction
to retest the short term resistance at around 23000 in October, prices have continued to drop after that.
Near term support is at 20500. If price does indeed fall below this level, investors can expect a bear run
down to 19500 range.
Given the rise in base rates by the Hong Kong government following the US rate hike, and plans by the
US to continue rising interest rates gradually, investors must prepare for hot money outflows, which is
likely to adversely affect both the property and stock market.
Hong Kong’s economic growth in 2015 had been primarily driven by domestic demand, with private
consumption experiencing a year-on-year growth of 4.3% in the third quarter. Amidst the slowing
Chinese economy and rising oil prices, for Hong Kong to continue experiencing modest economic
growth will largely depend on domestic demand and how it responds to the gradual interest rate hikes
by the Fed. If commercial banks also decide to increase their lending or deposit rates, private
consumption might also slowdown, leading to a bleak economic outlook for Hong Kong in the next
year.
References
Chan, H. (2015, November 13). Economic Situation in the Third Quarter of 2015 and Latest GDP and
Price Forecasts for 2015. Retrieved December 17, 2015, from
http://www.hkeconomy.gov.hk/en/pdf/15q3_pr.pdf
Fion, L., & Curran, E. (2015, September 9). Http://www.bloomberg.com/news/articles/2015-09-
08/hong-kong-dollar-peg-shows-strain-caught-between-fed-and-pboc-iebjnw7c. Retrieved December
17, 2015, from http://www.bloomberg.com/news/articles/2015-09-08/hong-kong-dollar-peg-shows-
strain-caught-between-fed-and-pboc-iebjnw7c
Shaffer, L. (2015, November 10). Why Hong Kong's property bubble looks set to deflate. Retrieved
December 17, 2015, from http://www.cnbc.com/2015/11/10/property-supply-jump-fed-rate-hike-
could-help-cut-hong-kong-real-estate-prices.html

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Japan
Economy in Brief
The economy of Japan is the 4th
largest economy in the world with its GDP standing at US$4601.46
billion in 2014 which represents 7.42% of the world’s GDP. According to World Bank, Japan’s GDP
per capita, PPP reached its all-time high at US$35,634.97 in 2014. It has the highest debt-to-GDP ratio
of 230% due to its aggressive monetary policies in efforts to reflate its economy.
Japan’s inflation rate currently stands at 0.3% far from its target rate at 2%. The country’s
unemployment rate reached its 10-year low of 3.1% in Oct 2015.
Japan is one of the largest manufacturing powerhouse in the world producing automobile, electronics
and agricultural goods. It recorded a trade deficit of ¥379.7 billion on Nov 2015. The Nikkei Japan
Manufacturing Purchasing Managers’ Index (PMI) is at 52.5 as at Dec 2015.
News & Events
Abenomics
On Dec 2012, Prime Minister of Japan, Shinzō Abe announced a 3-pronged massive economic reform
which consist of 3 arrows: fiscal stimulus, monetary easing, and structural reform based on a target
inflation rate of 2.0%. Since then, USDJPY has depreciated from its high at 75 to 121 as at Dec 2015
(Figure 1). The Nikkei 225 Index has also revived from its consolidation after the announcement and
continued to rally (Figure 2). On Apr 2013, Governor of Bank of Japan (BoJ), Haruhiko Kuroda
announced its quantitative easing (QE) program where it would purchase ¥60 to ¥70 trillion of bonds a
year. On Oct 2014, Kuroda launched an additional Quantitative and Qualitative Easing Program (QQE)
in efforts to further stimulate its economy and expanded its bond purchase to ¥80 trillion a year.
Structural Reforms
Japan is currently facing a series of super complex structural issues. PM Abe took a bold step and
opened up its agricultural markets to the Trans-Pacific Partnership (TPP) (below). The country is also
faced with a low fertility rate of 1.4 and shrinking work force (Figure 3). Abe is currently advocating
the participation of women in the labour force and made some legislation reforms to encourage
corporations to hire women. He would also continue to cut corporate tax rates to encourage corporations
to set up businesses in Japan. These structural reforms are long-term and would have to take years
before the effects could be seen. In addition, these are wicked problems that would not be resolved so
easily.
Trans-Pacific Partnership (TPP)
On May 2013, Japan joined the negotiations for the TPP. After years of negotiation and Japan’s
reluctance to open up its agricultural markets. On 5th
Oct 2015, every country finally came into
consensus and the TPP came into fruition. This partnership is one of the largest global trade pact in the
last two decades which encompasses 40% of the world’s GDP including the United States, with an
economic output worth US$30 trillion. It represents a huge potential for Japan to boost its exports to
compensate for its trade deficit.

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Figure 6: USDJPY Daily Chart
Figure 7: Nikkei 225 Index Daily Chart

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Figure 8: Japan Labour Statistics
Key Forecasts
USDJPY: Long Support: 118.448 Resistance: 125.852
Looking forward, the USDYEN is likely to depreciate further as the BoJ seems highly committed to
continue easing until there are signs of improvement in the overall economy which is unlikely the case
as the fundamentals of Japan are still very sluggish and far from its target inflation rate of 2.0% although
unemployment numbers are strong. The BoJ would also like to keep its Japanese Yen low in order to
encourage exports.
Nikkei 225: Long Support: 17,742 Resistance: 20,958
The Nikkei 225 and USDYEN has a strong positive correlation (Figure 4). This is given that, with a
weaker USDYEN, it is likely to boost exports as it is now cheaper for countries to import Japanese
goods therefore increasing sales and hence boosting the overall economy.
Interest Rate: Neutral
Japan’s interest rates are likely to remain at 0%. They have gotten themselves into a huge debt-to-GDP
ratio of 230%. It is unlikely that they would raise interest rates as they might be unable to service their
interest payments on these debt.

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Figure 9: Nikkei 225 vs. USDJPY

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Research Analysts:
Jethro Hee Ting Wei Khong Zhan Qing Lim Kai Yan, Timmy
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