Week in FX Asia – IMF Reduces Growth Forecast China Answers with Strong Manufacturing

• China PMI comes roaring back
• Lower Gold demand from China and India
• IMF upgrades Japan growth forecast

China PMI comes roaring back

This week the IMF reduced its global growth forecast and in particular reduced China from 7.6% to 7.4% with a comment aimed at lower internal demand. The Markit/HSBC Purchasing Managers Index contradicted the Fund’s assessment by posting an expansionary reading in June. Manufacturing output, orders and prices rose pointing to a healthier demand for Chinese products.

China has instituted a series of targeted mini-stimulus packages to avoid a hard landing after a difficult 2013. The measures announced in April are mostly aimed at boosting infrastructure, housing for lower income citizens and tax relief for small businesses. It is to early to tell if they have had an effect on the labor force and their impact on consumer consumption but the PMI is a good sign that the impact may prove the IMF wrong on China.

Lower Gold demand from China and India

Earlier this year China passed India to become the world’s largest consumer of gold. This had more to do with India taking a stance designed to control inflation and speculation on its currency the Rupee. Duties to import the metal were raised reducing the demand as prices become prohibitive. The decision was able to reduce Indian gold imports by 77% in the first half of 2014. July demand is usually weak given that there are no major festivals.

There was a jump of 65% in July due to the fact that the Reserve Bank of India allowed more companies to trade the metal abroad. Earlier today a Junior Minister of Trade issued a statement where he says there are no plans to lower the tariffs designed to curb gold purchasing.

Chinese appetite for the yellow metal has also subsided after a record 2013. Higher prices and a metal financing scheme scandal have driven demand lower in 2014. Hong Kong has posted 4 months with continuing lower purchases. Demand for physical gold has been lower due to higher prices after the metal has appreciated by 8% on safe haven investments.

IMF upgrades Japan growth forecast

The Japanese economy was one of the few upgrades on the IMF mostly negative revisions to global growth this week. The Fund had previously forecasted a 1.3% growth target for Japan in 2013. The more recent revision brought it up by 0.3% to 1.6% given the way the economy has responded to the sales tax hike in April. The IMF’s was not as positive on the outlook for 2015 as it sees the economy growing at 1.1% given the sales tax will be 10% by then and its impact will be hard to avoid.

Next Week For Asia:
The spotlight for next week will be in the US. A heavy US indicator week contains the FOMC rate decision and the Non-farm payrolls report on Friday. Given the current expectations of a rate hike by the Federal Reserve both events can combine to give market clear direction on global rates and currency prices.

In Asia Japan will issue its unemployment report. With a 3.5% unemployment rate there is little surprise expected. Similarly the Industrial production numbers will be published in Japan. The official PMI numbers will be published in China. After the Flash figures they should be inline and confirm China’s expansion.

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