Tale Of 3 Cities

Bangkok - Thailand may be declaring a state of emergency later today as the Constitutional Tribunal will be announcing its verdict in the dissolution of both major parties. Nine members of the Constitution Tribunal will meet this afternoon at the Supreme Court to express their individual judgements on the party dissolution case. The case involves Thai Rak Thai and the Democrats as well as three small political parties accused of legal violations in connection with the April 2 polling last year. The likelihood of mass protests being held in Bangkok prompted the Australian, British, Canadian, French, Japanese and US embassies to update their travel advisories to warn their nationals away from possible demonstrations in Bangkok on Wednesday and Thursday. Some 13,000 armed forces personnel have been mobilised throughout the country today in anticipation of likely protest rallies which could lead to violence.

This is on the back of an announcement by the Finance Ministry yesterday of a cut its 2007 growth forecast to a range of 3.8% to 4.3% from 4-4.5% earlier as investment and consumer sentiment have remained weak due to political uncertainties. Private-consumption growth is now projected at just 2.3% this year, compared with 3.1% last year and the previous forecast of 3.7%. The overall scenario does not spell good news for Thai stocks at all.

HK - The three-month Hong Kong interbank offered rate rose to 4.567% on Tuesday compared to the 3.9% average in January. This suggests a higher funding cost for local lenders resulting from declining liquidity levels in the banking industry. When HIBOR reaches 4.5 percent, banks may have to raise their best lending rates to offset higher costs. Please refer to the posting on "HKD - The New Carry Trade" for more details of the backdrop. Hong Kong banks may raise the prime rate by 25 basis points in one to three months to protect profit margins amid rising cost of funds. The problem is in Hong Kong they need to keep lending rates low to boost loan growth. On the other hand, banks are facing a higher cost of funds and lower net interest margins, particularly for mortgage loans on which interest rates are based on the prime rate. Market watchers say the need to raise interest rates this time is more pressing than a few months ago, as the previous surge in HIBOR was due to several large initial public offerings that sucked out funds from the banking system. This time, the falling liquidity level could be due to fears of a bubble forming in the A-share market, which has probably caused investors to pull out their money from Hong Kong's equity market, which is 40% made up of Chinese enterprises. The rising yuan has also highlighted the weakening of the Hong Kong dollar. The mainland currency has risen past the 7.65 level against the US dollar. The three-month HIBOR has pushed up to 4.6 percent, rising 20 basis points in the past 10 days, while the Hong Kong dollar has weakened to just over 7.82 against the US dollar. This will put pressure on HKMA: right now investors are leaking funds into other currencies, just in case. If that drip turns into a torrential thunderstorm: things could look very nasty for HK stocks and HKMA will have to jack up rates very significantly (maybe to 8% or 10% even) in order to stop outflow of funds.

Shanghai - Authorities finally resorting to various fiscal measures. This time its raising the stamp tax on stock trading to 0.3% from 0.1%. In the 16-year-plus history of China's stock market, a stamp tax hike usually led to a slump. China started to collect a stamp tax on the Shenzhen Stock Exchange in July, 1990, but only on sellers at 0.6 percent. Four months later, the buyers were also subject to the tax. The tax triggered a downturn in the Shenzhen market, forcing authorities to cut it in half to 0.3 percent in October 1991. At the same time, the Shanghai Stock Exchange also began collecting duty on both sides of trades. On May 10, 1997, the tax rate was upped to 0.5 percent, partly blamed for a bear market that lasted until mid-1999. The rate was lowered to 0.4 percent in June, 1998 before being adjusted to 0.3 percent one year later and to 0.2 percent in 2001. Regulator further lowered the duty in January 2005 to 0.1 percent in order to boost stock prices during a market slump lasting from 2001 to 2005.

Still, based on yesterday's posting on China, the early 5% correction in Shanghai markets is likely to be erased by the end of the day. The move will not be enough to poke holes in the bull.