>THE ASIAN MACRO NAVIGATOR (MERRILL LYNCH)

Hong Kong—dumping ground for global liquidity

Hot topic
■ Hong Kong’s monetary base doubled after September 2008. Along with China, it is one of two Asian economies that has matched the quantum leap in global monetary policy.

■ Why is narrow money exploding? We think Hong Kong sits at the confluence of three key trends in global liquidity: (1) loose Fed policy; (2) China’s appetite for non-USD foreign assets; and (3) the world’s desire for China-linked assets.

■ Hong Kong is a small, open economy. We expect a sharp upturn in the second of the year; but global demand will remain a long-term headwind.

■ Still, the liquidity boom has already proved inflationary for asset prices. We expect it to help reflate the economy and eventually inflate goods prices.

■ So we’re raising our 2010 growth forecast to 3.8%, from 2.9% previously. (No change to 2009.) We’re also raising our 2009-10 inflation forecasts. — TJ Bond

Asian snapshot: Asia—on track for the yo-yo recovery
Despite one or two months of mixed trade data, Asia is on track for the yo-yo recovery. The next two quarters may favor the small, open economies of Asia. The principle is very simple: as confidence returns and financing conditions ease, pent-up demand for inventories and final expenditure can boost exports very rapidly. What goes down will most likely come back up (the yo-yo). As this happens, the countries that have experienced the deepest contractions could well
post the steepest rebounds.

What to watch: China’s monthly data
Next week is all about the China data. Overall, we expect May to deliver a mixed message, due to China’s position in the cycle (exports to the G3 are still weak) as well as seasonality.

Money: total new bank loans in May should be similar to the level in April, while M2 growth should pick up slightly. Foreign trade: export growth should slow further in year-on-year terms, while import growth should be flat, leading to a slight narrowing of the trade surplus. Industrial output could ease slightly in May from April; however, trends in power usage point to a pick up in industrial momentum. Fixed investment should continue to accelerate in May, underpinned by residential construction as well as fiscal spending.

Finally, Taiwan’s exports should post a sequential increase in May after the disappointing April outturn.

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