A Tale of Two Markets
Yopie Hidayat (Contributor)
FINANCIAL markets are getting a New Year’s gift from The Federal Reserve. In its last meeting of the year, on Wednesday, December 16, the Fed chair sent out a very clear signal: injections of dollar liquidity will not be stopped in the near future. The Fed’s bond purchasing programs will continue, even once the economy is no longer in critical status due to the pandemic.
To the market, this is relieving news. Before this signal came out, investors were very worried. Entering 2021, the Fed might just reduce dollar liquidity injections if it sees that the US economy is no longer critical because the pandemic has been overcome. That injection of dollar liquidity takes the form of quantitative easing, in which the Fed buys bonds in mass. Since the pandemic started, the Fed has poured US$120 billion per month into the market.
Now there is a guarantee that the bond purchases will no longer depend on the status of the pandemic. The market can celebrate the new year with peace of mind. And it is not only developed economies that are enjoying this shower of dollars. Some of them spilled over to the emerging markets.
Interestingly, it is China that gets the most benefit from the Fed’s dollar deluge. Ironically, while President Donald Trump’s government maintained a hard stance against China in the context of a trade war even in its final days, China’s financial market is now enjoying the Fed policy intended to rescue the market and the US economy.
As an illustration, the CSI 300 index in the Shanghai exchange, the main benchmark for stock performance in China, has rose by 27 percent throughout the year. This jump is double that of the S&P 500 which is the benchmark for US stock prices. Such a rapid increase in prices was triggered, among others, by foreign investors buying stock through Hong Kong, whose purchases reached a net value of US$29 billion throughout 2020. In the bond market, the flood in foreign capital is much bigger. Foreign investors bought Chinese government bonds with a net value of 900 billion renminbi, nearly US$140 billion, in the first 11 months of 2020.
China’s economy is indeed worthy as a betting ground for investors. Even though the pandemic that brought the world economy down to its knees started here, the Chinese economy was also the fastest to recover. The International Monetary Fund predicted that China will be the only economy that could see positive growth in 2020.
If success in attracting portfolio investment funds is the measure of accomplishment, the situation in Jakarta’s market is a stark contrast. In the stock exchange, foreign capital is going away in droves. In the last week until December 18, an additional Rp1.43 trillion of foreign capital left Jakarta. When counted since the start of the year, the total value of outgoing foreign capital has reached Rp53 trillion.
In the bond market, the situation is slightly better. Foreign portfolio funds has started coming back to government bonds. However, when compared to the situation before the pandemic broke out, there is still Rp100 trillion that has yet to come back. Until December 16, Rp973 trillion of foreign capital is ‘parked’ in government bonds. Meanwhile, right before the pandemic, on February, this value reached Rp1,070 trillion at one point.
Going into 2021, investors in Indonesia must be wary of this phenomenon. The Indonesia economy will start rolling again. This is certainly good news. The issue is, with the recovery of industry, Indonesia must import more raw materials. The balance of trade could go back to a deficit. The current account deficit will also grow.
Before the pandemic exploded, the inflow of foreign portfolio investment had been an important stopgap. The stream of dollars coming in through the stocks and bonds were able to shoulder the burden on the balance of payments. It is this stream of dollars that also reduces the pressure on the rupiah exchange rate.
The Fed’s present means that the dollar is in abundant supply in the global market. China will party on to welcome it. Unfortunately, those dollars do not want to come here. This is a big problem. There will be no more support for the balance of payments deficit. Be ready to see a rupiah suffering under pressure.