Original AFTTC Asian Financial Cooperation Association 07.09.2024
Liu Xiaoshu is a researcher of the Expert Advisory Committee of the Asian Financial Cooperation Association and the chief economist of Bank of Qingdao
1. The current situation and characteristics of Asian money markets
Under the combined effect of the monetary policy tightening cycle and the steady economic recovery, Asian money markets as a whole have been characterized by high interest rates and steady growth in money supply since 2023. However, in terms of changing trends, there is a clear divergence between the currency markets of different Asian economies.
(1) Absolute value perspective: Money market interest rates remain high, and money supply grows steadily
Since 2023, most Asian economies are still in a monetary tightening cycle, and money market interest rates are therefore high. At the same time, although Asian economies are still facing pressure from the repatriation of US dollar capital, with the continuous strengthening of endogenous momentum and the improvement of external demand driven by the replenishment cycle of Europe and the United States, the Asian economy as a whole is showing a recovery trend, which supports the growth of broad money.
In terms of money market interest rates. Short-term interest rates in most representative economies were at historically high levels in June 2024. With the exception of Chinese mainland and Thailand, short-term interest rates in representative economies are higher than the average since 2014[1], with Indonesia's monthly average three-month interbank rate reaching 7.18%, the highest since 2010.
Table 1 Short-term interest rates and historical averages of representative Asian economies in 2023-2024 (%)
Source: Wind, CEIC
Note: The Philippines uses a weighted average interbank rate, and the rest use the monthly average of the three-month interbank rate, the same below.
In terms of money supply. At the end of June 2024, the broad money supply of the 11 representative Asian economies maintained steady growth, with an average year-on-year increase of 6.26%. In absolute terms, the year-on-year growth rates of Viet Nam, India, Saudi Arabia and Indonesia, which have sufficient money supply, were 11.1%, 9.72%, 10.23% and 7.8% respectively. Of the 11 representative economies, only Viet Nam and Saudi Arabia have seen broad money growth rates higher than the average since 2014.
Table 2 YoY growth rate and historical average level of broad money supply in representative Asian economies from 2023 to 2024 (%)
Source: wind
Note 1: Considering comparability and data availability, Japan and India use M3, Viet Nam uses the total liquidity of credit institutions, and others use M2, the same below.
Note 2: The latest year-on-year data for Viet Nam's broad currency is only disclosed until the end of May 2024; The same applies hereinafter.
(2) Perspective of change: Asian currency markets are clearly differentiated
Asian money markets as a whole are characterized by high interest rates and steady growth in money supply, but there are still significant differences between different Asian economies.
From the point of view of changes in interest rates in the money market. Compared with the end of 2022, except for Chinese mainland, Korea and Viet Nam, where money market interest rates have declined significantly, short-term interest rates in other representative economies have either increased or remained relatively stable. Among them, interest rates in Indonesia, the Philippines, Saudi Arabia, Thailand and India have increased significantly, while interest rates in Malaysia and Singapore have not changed much, for example, Singapore's 3-month interbank rate has decreased by only 0.19 percentage points compared to the end of 2022. It is worth noting that while Korea's money market interest rates have begun to fall, its benchmark interest rate remains at an all-time high.
Table 3 Short-term interest rates and changes in representative economies (%)
Source: wind
From the perspective of changes in the growth rate of broad money, at the end of May 2024, the growth rate of broad money in representative economies increased by 0.24 percentage points on average compared with the end of December 2022. Among the 11 representative economies, Viet Nam has begun to cut interest rates in March 2023, with loose monetary policy and economic recovery, and broad money growth rates growing rapidly; Although Korea, Malaysia, Saudi Arabia and India are still in a tightening cycle, the growth rate of money supply has increased without declining under the support of domestic demand, especially India and Saudi Arabia, which have increased by 3.39 and 4.79 percentage points year-on-year, respectively; the growth rate of money supply in other economies has declined, namely Chinese mainland, Thailand, Indonesia, the Philippines, Singapore, and Japan. Among them, Chinese mainland's M2 growth rate declined the most, but this does not mean that Chinese mainland's monetary policy is tightened, and the M2 growth rate of 6.2% is still a relatively high level, mainly because the central bank of China continues to curb idling, squeeze water on finance, and constantly take measures to revitalize financial resources that are inefficiently occupied, resulting in the effective compression of M2 in the inflated part, and the year-on-year growth rate of M2 under a high base is therefore rapidly declining.
Table 4 Year-on-year growth rate and change of broad money supply in representative economies in Asia (%)
Source: wind
According to the different trends in the money market, the 11 representative economies can be divided into four categories. The first group of economies, where broad money growth has accelerated and market interest rates have risen, is represented by India; The second group of economies, where broad money growth has accelerated and market interest rates have fallen, is represented by Viet Nam; In the third group of economies, the growth rate of broad money has slowed down and the market interest rate has fallen, which represents China as the country; The fourth group of economies, where the growth rate of broad money has slowed down and market interest rates have risen, and the representative countries are Japan and so on; The details are shown in the figure below.
Figure 1 Divergence of money markets in representative economies in Asia
Source: wind, compiled by the author
2. The reasons and logic behind the divergence of Asian currency markets
Asian currency markets are divergent, mainly due to the missynchronized and divergent economic recovery and monetary policies in Asian economies.
(1) The monetary policies of representative economies are divergent
Changes in the currency market mainly depend on the country's monetary policy. Asian economies generally adjust their monetary policies flexibly according to domestic economic and inflation conditions, as well as the Fed's policy adjustments.
Since 2023, most Asian countries (such as Korea, Thailand, Malaysia, Singapore, Indonesia, the Philippines, Saudi Arabia, India, etc.) have successively pressed the "pause button" on interest rate hikes, but the benchmark interest rate is still at the highest level since April 2020 and is in a "tightening cycle". The main reason is that with the continuous postponement of the Fed's interest rate cut expectations, many Asian countries and regions are facing the pressure of sharp currency depreciation and capital outflows, which has constrained the monetary policies of various countries and the timetable for interest rate cuts. Tightening policy is the main reason why money market interest rates are at historically high levels in many representative economies.
Japan is one of the few countries where monetary policy has turned from loose to tight, and since 2022, Japan's inflation rate has rebounded significantly, and as of February 2024, the year-on-year growth rate of Japan's CPI and core CPI has exceeded the target level of 2% for 23 consecutive months, providing support for the Bank of Japan to abandon the negative interest rate policy: On March 19, 2024, the Bank of Japan raised the short-term policy rate from -0.1% to 0-0.1%, ending the era of negative interest rates. As Japan enters a rate hike cycle, short-term interest rates in Japan have risen, and broad money growth has slowed.
Chinese mainland has maintained an accommodative stance in order to promote domestic economic growth, and interest rates have remained low. Due to the unexpected slowdown in the economy in 2023, Viet Nam's monetary policy focus has also shifted from controlling inflation to supporting economic recovery, taking the lead in starting an easing cycle, reducing interest rates four times in a row in 2023, and reducing the refinancing rate from 6% to 4.5%. Under the loose monetary policy, the monetary interest rates of Chinese mainland and Viet Nam are on a downward trend.
Table 5 Divergence of monetary policies in representative economies since 2023
(2) The economic fundamentals of representative economies are differentiated
Since 2023, the economies of Asian countries have gradually recovered, and the economic growth rate of most economies is now close to the pre-pandemic level, but there are still significant differences in the economic fundamentals of different economies.
In terms of specific countries, driven by both domestic demand and exports, some Asian economies represented by India and Viet Nam have grown strongly, with year-on-year GDP growth rates of 7.76% and 6.42% respectively in the first half of 2024; Some Asian economies have relatively solid economic growth, for example, Chinese mainland and Korea grew by 5% and 2.3% respectively in the first half of the year; There are also some economies with weaker economic performance, such as Thailand and Japan, of which Japan has had negative year-on-year GDP growth for two consecutive quarters.
Figure 2 GDP growth by economy in the first half of 2024
Source: wind
Note: India and Saudi Arabia are GDP growth in the first quarter, and other economies are GDP growth in the second quarter.
At the same time, inflation in most Asian countries has fallen back to or below the central bank's target range, but the level of inflation in Asia still varies. Compared with the end of 2022, the most significant price decline among the representative economies in Asia at the end of June 2024 was in Thailand, the Philippines and Singapore, with the year-on-year growth rate of CPI falling by 5.27%, 4.4% and 4.1% respectively in the month. It is worth noting that the current inflation rate in Thailand is currently low, with CPI in June at 0.62% year-on-year, close to deflation. Viet Nam and India saw relatively small year-on-year declines in CPI growth. In addition, due to factors such as insufficient market demand and strong supply, inflation in Chinese mainland continued to be low, and the CPI in June was only 0.2%, a three-month low
Figure 3 Changes in inflation in different economies in Asia in June 2024 compared to the end of 2022
Source: wind
Monetary policy is the anchor point of changes in the money market, but the operation of the money market itself is closely related to the economic operation system, and macroeconomic factors such as inflation and economic growth are also important factors that cause fluctuations in the money market. In fact, while most Asian countries have maintained tight monetary policies, differences in economic fundamentals have led to differences in the performance of short-term interest rates and broad money across economies.
For example, since 2023, the benchmark interest rates of Korea and India have been raised, but the trend of money market interest rates in the two countries has diverged: Korea's money market interest rates have fallen, while India's money market interest rates have risen. The reason for this is that there are significant differences in the fundamentals of the two countries: India's economic expansion is stronger than that of Korea, and companies and individuals have stronger demand for short-term funds, which has led to higher short-term interest rates. At the same time, Korea's inflation has slowed even more, and the cooling of market inflation expectations and future interest rate cut expectations have jointly contributed to the decline in Korea's market interest rates. Similarly, Viet Nam and Chinese mainland both implemented monetary easing, but Viet Nam's stronger economic growth led to a significant acceleration in broad money growth, while Chinese mainland's relatively solid economic growth slowed due to the impact of tighter regulation.
3. The future outlook of Asian money markets
In the second half of the year, the Federal Reserve is expected to start a new round of monetary easing cycle, and most central banks in Asia will also start the process of cutting interest rates. At the same time, uncertainties about Asian economic growth (such as downside risks in the global trade cycle, risks derived from the United States election, etc.) and heightened political risks in some Asian countries will affect the normal operation of currency markets in Asian economies.
(1) Asian central banks will shift to a monetary policy easing cycle
Since 2024, inflation in Asian economies has continued to decline and has fallen back into the comfort zone of central banks, providing conditions for a return to the easing cycle. However, against the backdrop of the Fed's interest rate cut expectations and maintaining high interest rates, many Asian central banks have been forced to continue tightening monetary policy. For example, in April 2024, Bank of Indonesia unexpectedly raised its key interest rate by 25 basis points to 6.25% in response to the continued weakening of the rupiah under pressure from a stronger dollar.
United States CPI rose 2.9% year-on-year in July 2024, the smallest increase since 2021. United States inflation is continuing to fall towards the central bank's 2% target, paving the way for potential near-term rate cuts. On August 23, Federal Reserve Chairman Jerome · Powell said that United States, "the upside risk of inflation has weakened, and the downside risk of employment has increased", and the "time has come" to start cutting interest rates, which means that the focus of the Fed's policy decisions in the future will be more from inflation to the job market, and it is a high probability event that interest rate cuts will start in September.
Looking forward to the second half of the year, as the curtain of the Fed's interest rate cut opens, more Asian central banks will start the process of cutting interest rates, Asian monetary policy will move from differentiation to convergence easing, short-term interest rates are expected to decline overall, and the growth rate of broad money will rebound marginally. At the same time, if the Fed cuts interest rates, it is expected that the US dollar may weaken slightly in the second half of the year, which is good for the continued growth of Asian economies.
(2) Asia's economic growth is facing great uncertainties
The smooth operation of the currency market is inseparable from stable and positive economic fundamentals, and Asian economies still need to face various risks and challenges from internal and external sources.
First, the economic recovery of some economies will face multiple challenges. On the one hand, some Asian economies are already facing a sluggish recovery. For example, since 2024, although Thailand's tourism and exports have recovered, its domestic consumption and investment levels have not yet fully recovered, and Thailand's economy has tended to a long-term low growth. Japan is also facing a sluggish recovery, with a revised GDP growth rate of -2.9% in the first quarter, which has been a continuous negative growth for several consecutive quarters. On the other hand, the momentum of domestic demand in United States is gradually weakening, which may trigger a downward trend in global manufacturing and trade in the future, and Asian economies, especially those with high dependence on foreign trade, are facing downward pressure on economic growth.
Second, the United States election brings uncertainty. The July 13 gun incident in Butler, Pennsylvania, United States, will attract more votes for Trump, the Republican candidate in the 2024 United States presidential election. After that, there were storms such as Biden's withdrawal from the election and Harris's appearance, and there are still three months before the United States election, and there are still a lot of variables. If Trump returns to power, it means that the United States administration's approach may change, and the tariff policy on Asia and the pace of interest rate cuts in United States will be affected, such as Trump's threat to "impose a flat tariff of 10% on all imports" and "cancel China's most-favored-nation status and achieve complete decoupling from China". The United States election will inject considerable uncertainty into global trade relations, and most of the economies in the Asian region are highly dependent on foreign countries, such as Singapore, Viet Nam, Malaysia, Thailand and Korea, etc., and economic growth is also facing greater uncertainty, which is not conducive to the stability of the national currency market.
Under the impact of many internal and external uncertainties, Asia's economic growth is expected to be under pressure, and the performance of various economies may continue to diverge in the future, and there will be some differences in the performance of currency markets in different economies.
(3) Political risks have increased in some Asian countries
In addition to monetary policy and economic fundamentals, political factors are also important factors affecting the currency market. The uncertainty of the political environment affects the growth of a country's economy to a certain extent, and is not conducive to the normal operation of the currency market. At present, the competition between different political forces in some Asian countries is becoming white-hot, and the political situation is becoming more uncertain. For example, Japan Prime Minister Fumio Kishida recently decided not to participate in the LDP presidential election in September and will retire as prime minister; Thailand Prime Minister Saita was terminated by the Constitutional Court in connection with the qualification case. In addition, some Asian countries already have problems such as imperfect democratic institutions, low political stability, and government corruption, and the political risks are high. For example, recent student protests in Bangladesh over the government's reinstatement of the "civil service quota system" have escalated into nationwide violence, eventually forcing the Hasina government to resign. Bangladesh has now formed an interim government, but the country's political chaos continues, and Bangladesh may fall into long-term economic stagnation and social unrest.
[1] The average short-term interest rate in Korea is the average since 2004.
[This article is the 19th issue of the Asian Financial Cooperation Association in 2024 (the 256th issue in total)]
【About the Author】
Liu Xiaoshu is a researcher of the Expert Advisory Committee of the Asian Financial Cooperation Association and the chief economist of Bank of Qingdao. Doctor of Science from Tsinghua University, Doctor of Economics from Xiamen University, Postdoctoral Fellow in Finance from Chinese University, won the "China Research Excellence Award" in 2008, and was awarded the title of Shandong Province Financial High-end Talent in 2017. He used to work in the head office of China Merchants Bank and the head office of China Everbright Bank.
【Committee Profile】
Founded in May 2017, the Asian Financial Cooperation Association (AFCA) is the first international financial social organization initiated by China, and its expert advisory committee is composed of more than 100 domestic and foreign experts from more than 40 countries and regions. Positioned as "market-oriented, problem-oriented, in-depth observation, and smart solutions", the Expert Advisory Committee of the Asian Financial Cooperation Association has formed Chinese and English products such as "Asian Financial Cooperation Association Research Trends", "Asian Financial Observation" and "Guangdong-Hong Kong-Macao Greater Bay Area Financial Development Report", and has held high-end financial forums such as quarterly forums and annual meetings, and has continuously voiced the voice of Asia in the international financial arena.