PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

20 August 2010

1 China Gradually Turned To Asia To Diversify Its Forex

Reserve Holdings

2 US Leading Indicator Rebounded But Manufacturing

Activities In Philadelphia Region Contracted

3 Japan’s All Industry Index held Stable M-o-m In June

Tracking The World Economy...

Today’s Highlight

China Gradually Turned To Asia To Diversify Its Forex Reserve Holdings

China is increasingly looking to Asian neighbours’ currencies and debt markets in a move to reduce its reliance on the
US dollar. It more than doubled its investment in South Korean debt this year, spurring the notes’ longest rally in more
than three years. Korean Treasury bonds held by Chinese investors rose by 111% to US$3.4bn at end-June 2010, from
US$1.6bn at end-2009, according to the Seoul-based Financial Supervisory Service. Despite the sharp jump, China’s
holdings of South Korean notes remained small at a little more than 0.1% of its US$2.45 trn reserves. Similarly, China
has been buying record amounts of Japanese government debt because it is less risky than US debt, at least in the short
term, according to a Chinese government economist. The country bought a net US$20.3bn of Japanese debt in 1H 2010,
compared with a net selloff of US$69m a year earlier and far surpassing its record of US$3.0bn in 2005. Yu Yongding,
a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France,
Spain and Germany from 20 June to 2 July said on 15 August that the nation has also been buying quite a lot of European
bonds. Chinese purchases of Europe’s bonds came in the wake of measures taken by European policymakers to allay
concern the sovereign-debt crisis will threaten the single-currency union. Indeed, foreign investors were net buyers of
the Euroland debt when European Union announced a loan package worth as much as €750bn (US$956bn) to backstop
euro-area governments in May. They purchased €37.4bn of bonds and notes after buying €49.7bn in April.

In contrast, China’s holdings of US Treasury fell by 5.7% to US$843.7bn at end-June 2010, from US$894.8bn at end-
2009. The figure, however, does not fully reflect the extent of China’s holdings of US Treasury, as it also makes large
purchases through offshore accounts in the UK and Hong Kong that are not captured by the Treasury Department’s
monthly data.

Concerned about weakening US economic growth and the Treasury’s record borrowing, Asian central banks are gradually
switching put of the US dollar assets to safeguard reserves. Indeed, South Korea, Malaysia and India reduced their
holdings of Treasuries, US government data show. The allocations to US dollar in official foreign-exchange reserves
declined to 61.5% in 1Q 2010 from 62.2% in 4Q 2009 and a high of 66.6% in 4Q 2005, the International Monetary Fund
data show. The yen’s share was at 3.1%, up from 3.0% and a low of 2.9% in 4Q 2007. The euro’s share was at 27.2%,
little changed from 27.3%, even after the currency tumbled 5.7% versus the US dollar during the 1Q, but higher than
24.3% recorded in 4Q 2005.

Some currency traders attributed the recent appreciation of the yen against the US dollar to China’s move in buying more
Japanese debt. Indeed, currencies in the region have been appreciating against the US dollar year-to-date. As a resul,
some expressed concerns that their exports may be affected. Indonesia’s central bank and Thailand’s prime minister
said in the past month that they are watching the performance of their nation’s currencies amid speculation gains will

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 20 August 2010

curb exports. Taiwan’s dollar has depreciated in the final minutes of trading on most days in the past four months as
policymakers intervened to suppress it. Exports account for about two-thirds of Taiwan’s GDP.

The Malaysian ringgit has also benefitted from the improving sentiment over the regional currencies. This was aided by
a widening interest differential in favour of Malaysia versus the US, after Bank Negara Malaysia raised its key policy rate
for the third time this year. The liberalisation of administrative rules on foreign exchange transactions on 18 August
further boosted the ringgit, which soared to a near 13-year high against the US dollar on 19 August. Meanwhile, the
ringgit was added to a small group of currencies that are allowed to be traded directly against the yuan on 19 August,
a small part of China’s plan to increasingly use the yuan to settle trades throughout Asia. Before the addition of the
ringgit, the only currencies with that privilege were the US dollar, pound sterling, yen, euro and Hong Kong dollar.
Nonetheless, with the exception of the US dollar, those currency pairings are lightly traded, and the ringgit will likely be
no different.

The US Economy

Leading Indicator Rebounded In July

◆ The US Conference Board’s index of leading indicators, which provides early signal on the direction of the
economy over the next three to six months, rebounded to increase by 0.1% mom in July, from -0.3% in June.
This was reflected in a pick-up in average workweek, the pace of deliveries and orders of non-defence capital goods
as well as a smaller decline in stock prices and a positive contribution from jobless claims. These were, however,
offset partially by a slowdown in consumer goods orders and a smaller contribution from interest rate spread as
well as declines in consumer expectations, money supply and building permits. Meanwhile, the leading index’s six-
month annual rate of change moderated to 4.1% in July, from 5.1% in June and a high of +11.6% in December
last year. This was the fourth consecutive month of easing, suggesting that the US economy will likely continue
growing, albeit at a more moderate pace in the 2H of the year. Indeed, consensus expects US real GDP
to expand at a more moderate annualised rate of around 2.6% in 2H 2010, after expanding by 3.1% in the 1H.
For the full-year, real GDP, however, is projected to grow by 3.0% in 2010 before easing to +2.80% in 2011 and
compared with -2.4% in 2009.

Manufacturing Activities In Philadelphia Region Contracted In August

◆ The Philadelphia Business Outlook Survey’s diffusion index of current general activity fell to -7.7 in
August, compared with +5.1 in July and after reaching a recent high of +21.4 in May. The Philadelphia Fed region,
which comprises eastern Pennsylvania, southern New Jersey and Delaware, is more exposed to the auto sector and
less influenced by financial services and trade than the New York region. This was the firs decline in a year,
suggesting that factory activities in the region contracted during the month, on account of a sharper drop in new
orders and delivery time, while shipments and average workweek slipped into a contraction. As a result,
manufacturers cut prices for the last three consecutive months and workers for the second month in three months.
At the same time, they also reduced inventories. Meanwhile, input costs eased during the month. Over the next
six months, the future general activity index also eased to 19.6 in August, from 25.0 in July and the peak
of 52.0 in March. This suggests that manufacturing activities are likely to continue expanding, albeit at a more
moderate pace, in the months ahead. The slowdown was due to declines in average work-week, employment and
inventories, indicating that firms have turned cautious on the back of slowing economic growth. These were,
however, mitigated by a pick-up in new orders, delivery time and unfilled orders, while shipments remained stable
during the month. Meanwhile, firms indicated that they will likely increase capital spending in the months ahead
and they expect input costs to rise but selling prices to ease further in the near term.

Asian Economies

Japan’s All Industry Index held Stable M-o-m In June

◆ Japan’s all industry index held stable at 0.1% mom in June, the same rate of increase as in May and
compared with a high of +1.9% recorded in April. This was the third straight month of increase, indicating that
economic activities in the country continued to expand, albeit at a moderate pace. A pick-up in
government activities and a smaller decline in services activities were offset by a decline in manufacturing and
construction activities. Government activities rebounded to +0.7% mom in June, from -0.1% in May, while services
activities fell by a smaller magnitude of -0.1% mom, compared with -0.8% during the same period. Manufacturing

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 20 August 2010

and construction activities, on the other hand, fell by 1.1% and 1.8% mom respectively, compared with the
corresponding rates of +0.1% and +9.2% in May. Yoy, all industry index moderated to 3.0% in June, from +3.3%
in May and a high of +5.0% in March. This was the third consecutive month of slowing down, indicating that Japan’s
economic activities are losing momentum.

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