A Guide To Home Loan Refinancing

For those who have never been exposed to the concept of “refinancing”, home loan refinancing may seem like a baffling notion.  After all, what good could possibly come from getting a new home loan… just to pay off your old one? Wouldn't you just go back to square one after the whole process? These could be some of the questions you’re asking yourselves, and understandably so.

In reality, home loan refinancing is a widely-adopted practice with many potential benefits. Home buyers far and wide undertake it in order to lower the interest they’re paying on their home loans, reduce their monthly loan repayment amounts, and generally alter their loan terms to better suit their financial needs.  In fact, some even refinance to free up cash riding on the inherent values of their properties!

Want to refinance your home loan in Malaysia?
Click here to compare different rates by different banks.Courtesy of: iMoney.my

A Malaysian Guide to Home Buying Fees & Charges

Like any other country, buying a house and taking a home loan / mortgage in Malaysia involve legal fees & charges - which many people fail to take into consideration especially when they’re buying a property for the very first time.

So to all Malaysians buying your dream houses right now, allow iMoney to show you ALL the fees and charges involved when you buy a house or apply for a home loan.

The 3rd Way of Shopping ?

Most probably you are reading this while shopping, waiting for your wife/girlfriend trying on a new dress or shoe? Congratulation... You're never be more relevant to read this article. Wait, what is the 3rd way?

1st way ---> Cash

2nd way ---> Credit Card

3rd way ---> ???

Introducing the NEW concept of shopping...

The whole idea behind 3rd way is to promote responsible shopping within our community. With proper planning, you can avoid spending all your cash on the item you want.

Instead, you can shop and be rewarded with the interest rates from saving the extra cash reward. You can plan to spend your money for a gadgets, a journey or whatever items and get amazing deals and pay in the future, helping you to get the things you want hassle free.

After changing the buying concept, you will arrive at an interesting question: "If shopping could be free from pain of credit and the guilt of cash, what would I buy?". Happy answering...

Yup. This is the new concept that is similar to what introduced by Mach by Hong Leong bank such as its Dream JAR Saving account.

What is Dream JAR Saving account?

• To set your own golds (Samsung S4?)
• Start with just RM50 or more plus a bit of good planning
• Choose the period to achieve your goals in 6, 9, 12 or 18 months
• Save the amount of money set monthly
• Get rewarded and save more with extra cash when you complete your goal through prompt monthly deposits
• Get (not pay) an interest of 2% p.a. on ALL balances compared to regular savings accounts which offer tiered based interest rates - calculated on daily basis

By using the 3rd way of shopping, you don't have to worry about repayments or overspending anymore. What else? Cash rewards !!!

Source: The Third Way of Shopping

Watch the video here

Consolidating Credit Card Debt: 2 Easy Methods in Malaysia

Credit cards have become a part of life in Malaysia. But as much as they make life a lot more convenient; credit cards can also lead to an unmanageable amount of debt. In some cases, credit cards have even led to bankruptcies.

If you have a credit card debt that seems to be spiralling of control, it may be the right time to consider debt consolidation. In Malaysia, there are two common debt consolidation methods that are highly workable.

1) Credit Card Balance Transfer

Credit Card Balance Transfers involve the transferring of money that you owe on your current credit card account to a new credit card.

Balance transfers offer a number of different benefits, including lower interest rate and the ability to simplify your credit card debt payment process. 

How Credit Card Balance Transfers Can Work for Debt Consolidation:

●     If you have accumulated a significant amount of credit card debt, there is a good chance you are currently being charged the maximum interest rate. Based on the tiered interest rate structure adopted by banks in Malaysia, this maximum rate is generally 17.5% p.a.

●     If you are paying the maximum interest rate, you are probably finding it quite difficult to keep up with your credit card debts. High interest rates can cause your credit card balance to rise quickly. For example, if the amount you owe on your credit cards is RM10,000, you are essentially adding RM146 in interest to your debt each month.

●     A credit card balance transfer could give you a break from paying high interest. In some cases, you'll find balance transfer programmes that offer zero interest rate, at least for the first year or so. By taking advantage of one of these offers, you will have a better chance of paying your debt off.

●     Banks often charge a once-off fee of 3% when transferring a credit card balance. However, in the long run you will still end up paying less, due to the lower interest rate.

Example of How Much You Could Save:

Credit card average maximum interest rate = 17.5%

Lowest known interest rate for balance transfer (for a limited time) = 0%

Amount you could potentially save on interest (for a limited time) = 17.5%

2) Personal Loan

The concept of taking out a personal loan in order to pay off credit card debts might sound a little unusual. However, if you take a strategic approach by taking advantage of interest rate differences between personal loans and credit cards, this method can actually work quite well.

How Personal Loans Can Work for Debt Consolidation:

●     If you have accumulated a significant amount of credit card debt, there is a good chance you are currently being charged the maximum interest rate. Based on the tiered interest rate structure adopted by banks in Malaysia, this maximum rate is generally 17.5% p.a.

●     The interest rates on many personal loans are far lower than credit card maximum interest rates. For example, some personal loan interest rates in 2013 can be 9.88% p.a. or less, depending on your loan amount and term. If you are a government servant, the rate dives even lower.

●     If you take up a personal loan with significantly lower interest than a credit card’s, you could technically be paying much less over the long run. The savings you’re getting from your interest could even help offset the charges and fees associated with the application for a personal loan.

Example of How Much You Could Save:

Credit card average maximum interest rate = 17.5%

Known interest rate on a personal loan = 9.88%

Amount you could potentially save on interest = 7.62%

This article is brought to you by iMoney.my - the first website in Malaysia comparing credit cards, loans and mortgages - free of charge and independently.

Higher Credit Card Financing Rates Effective March 2012

Attention to all credit card holders (especially for the following mentioned banks), interest rates for outstanding credit card balances, and late payments will be revised higher. At least 3 banks, namely Hong Leong Bank, Ambank and Citibank already published the rate revision effective March 2012 on respective website.

What did Bank Negara Malaysia (BNM) said?

According to The Star Newspaper, a spokesman from BNM said the repricing of rates was not due to directive from the central bank, explaining that it was done by the banks. "However, the new rates are withing the range stipulated in Bank Negara's credit card guidelines," he told The Star.

Rationale behind the revision

Beautifully, banks said the revision was done to promote sound financial management by saying that the move would encourage card holders with outstanding debts to pay them off. But, what we understand is that for those who are in debt right now, they were being slapped with a higher finance charges plus late payments charges. Meaning, they are being drown from river to sea, pushing them into deeper debt. Is this called sound financial management?

Perhaps, YES, it is a very sound risk management for banks, definitely not card holders. Why banks revise the rates now? Well, we guess that banks are foreseeing a tighter money supply and potential deteriorating quality of loans amid the ongoing European Debt crisis. They have their strong point though.

FAQ

If I am a new card holder, what is the financed rate applied to me?

The highest finance charges will be applied (etc 18% p.a for Hong Leong Bank). The applicable tiered finance charges will only be effective until such time when you have the minimum 12 months repayment record with the bank.

How did Singapore's Cooling Measures Impact Malaysia's Property Sector? (Dec 2011)

On 7th Dec 2011, the Singapore government announced that it would impose an Additional Buyer's Stamp Duty (ABSD) to moderate investment demand for private residential property and promote a more stable and sustainable market. This is needed in view of the stubbornly high inflation rate in Singapore amidst the slowing demand from developed markets. For those who don't know, inflation rate in Singapore was mainly contributed by surging property prices.

The ABSD was effective 8 Dec 2011. After the announcement, property-related stocks slumped last week, following by a slump in banking stocks because of an expected slower housing loan growth. The latest measures are a near-term negative for property developers with an anticipated trend in lower average selling prices and transactional volumes, which will hurt profitability. Nevertheless, most large-cap property developers in Singapore are relatively well diversified, not just across sectors (industrial and commercial), but also geographically.

Under the latest cooling measure, the ABSD will be added on top of the current Buyer's Stamp Duty, and apply to the purchase price or market value of the property (whichever is higher) according to the type of purchase as below:

1. ABSD of 10% for foreigners and corporate entities buying any residential property
2. ABSD of 3% for permanent residents who already own one property, and buying the 2nd and subsequent residential property
3. ABSD of 3% for Singaporean citizens who already own 2 properties, and buying the 3rd and subsequent residential property.

What's the Impact on Malaysian Property Sector and Developers?

Because of our closely linked economies, some of our property players already ventured into Singapore property market, such as Sunway, SP Setia, IOI Corp and YTL Land. According to OSK research report, Sunway has 4 ongoing projects with a total GDV of around SGD1.7bn under its 30:70 joint venture with Ho Hup Group and a small wholly owned project with at GDV of SGD32.8m. Two of the projects, which are under the Executive Condo (EC) and Design, Build and Sell Scheme (DBSS), are exempted from the ABSD. While the remaining three ongoing projects, coupled with another upcoming project (GDV: SGD357m), are under private development (PD) which is subjected to the ABSD. However, with its ongoing PD projects already achieving a strong take-up rate at around 70%, we believe the impact on Sunway will be rather minimal.

Sector wise, Finance Malaysia believes that there will be a in-flowing of money to our shore given its proximity to Singapore, coupled with the attractively packaged Johor's Iskandar Development Region (IDR). This would be a timely process where IDR is gaining traction with basic infrastructures were almost completed. Those developers which had already jumping into IDR may benefits from the announcement. Tebrau Teguh, being one of the most sensitive stocks linked with IDR may see some buying interest. 

Asia property sector to deteriorate?

A combination of excess liquidity, low interest rates and a robust macroeconomic outlook has pushed prices up over the last few years. As a result, housing affordability for low and middle income families has worsened across the region, with low interest rate slightly cushioning the adverse effect of higher prices. Several central banks have intervened and introduced regulatory measures - such as higher minimum down payments (etc. Msia) and more land releases for construction (etc. Singapore) - to cool down the markets and slow credit expansion.

Within a specific market, the prime segment should hold up better than the mass-market segment. Should the real estate market correct instead, steep corrections for the mass segment are unlikely because of the following reasons:

1. Rental Yields still appear attractive in the current low interest rate environment;
2. Residential vacancy rates are low in many Asian cities, especially in Hong Kong and Singapore (not in the case for Msia);
3. Governments are well aware of the potential negative spillover effects of a strong housing market downturn to the overall economy. Thus, they are more proactive in making monetary decision to juggle between tightening or loosing the monetary policies.

Budget 2012: Another interesting debate --- RPGT

Property prices had been skyrocketing since 2009, creating more millionaires in Malaysia. The key factors behind the increasing properties prices were low interest-rate environment, attractive housing loan packages and ample of liquidity in financial system. These had prompt investors ,and general public too, to invest into properties searching for better return among all the investment instruments. Oppss... Favorable Real Property Gain Tax (RPGT) is one of the factor too.

While creating millionaires, many middle and low income groups are facing difficulties to come out the higher capital required to purchase their homes. Genuine buyers, who are first-time house buyers, were being forced to delay their buying and ended up renting. This will resulted in widening wealth gaps between Malaysians. As such, government had proposed to increase the quantum of RPGT to counter the potential socioeconomic backlash. (see attachment)

Curbing speculations?

Traditionally, there are two important tools available to government to curb excessive properties speculations and they are interest rate and RPGT. Since 2008 global financial crisis, central banks globally including Malaysia had slashed their interest rate to all time low in order to spur economic activities.

Picture taken from Business Times

On top of that, RPGT stayed low at a flat 5% for properties sold within 5 years. "5% only?" you may ask. Yes, and this is a contributing factor on why properties prices remain elevated.

Is it enough?

However, economists are saying that the latest announcement made on RPGT was relatively "too soft" in contain the problem. Anyway, this is a good news though for property speculators or investors as 10% RPGT within 2 years can be easily absorbed. Then, how much is enough?

     

     Genuine buyers said: "Higher is better".

     Property developers said: "Current rate is enough".

Finance Malaysia reckons that 10% is definitely not enough. The marginal increments looks like government is only "entertain" the perception of general public, while protecting property developers, we think. As such, we are suggesting a higher rate as below:

By imposing a higher RPGT, that could possibly boosted government tax revenue, thus lowering down the over-optimism budget deficit target. Why don't government implement that way?

How to invest during HIGH Inflation era? (Sept 2011)

What is the main risk for Asian economy? None other than Inflation. Across the region, fast-growing countries such as Singapore, Indonesia, India and China are reporting faster than expected price increases in tandem with their economic success.

To fight inflation, many countries already carried out their tools of tightening. We have Singapore who fights imported inflation via stronger currency. Meanwhile, other countries are going for the traditional way of hiking interest rate and increasing bank reserve requirement since last year. At first, Bank Negara Malaysia called it as "normalization", but it seems to be "containerization" going forward to contain inflation.

Who's fault?

There are 2 causes for the problem, which I categorized them into international and national. Among the international contributing factors were:

1. Loose monetary policies practiced by US and Europe, who slashes interest rate to almost zero and carried out large scale of asset purchases. Yet, it failed to rejuvenate a sustainable economy.
2. As a result, these easy-money flushing into Asia in search of higher returns is fueling asset bubbles here. Then, we raised interest rates, and this had lured even more money into Asia together with an even stronger currency.
3. Other then equity, easy-money also flown to Commodity markets, including food staples and basic materials. Also, searching for higher return in view of greater demand by Asian countries to produce or consume more. This had pushed up inflation.

In the other end, we have National factors such as:

1. Consumer spending has risen much faster than supply. This is very obvious in populated countries such as China, India and Indonesia.
2. While western countries facing high unemployment rate, our side is not only hiring, but increasing wages too. Hong Kong and Malaysia are implementing a minimum wage for the first time. Thailand is the next to follow. Who is going to absorb the higher wages? Definitely not companies, it's consumers.

So, how to invest during high-inflation era?

Equities. Although higher inflation did not bode well for the economy, but, the revenue and earnings of companies shown in the balance sheet is greater. In other words, inflation can show up in earnings growth for some companies. To protect our investment, we should select those companies that have sufficient pricing power to pass on the additional cost to end clients.

What if US failed to increase Debt Ceiling? (31 July 2011)

Deadline gets closer and closer, yet US have not come out a concrete solution to calm the world. Whether tax increases should be included in a deficit reduction agreement or not, both Democrats and Republicans are standing firm without compromise. Republicans insist that any deal to cut deficits should involve spending cuts only while Democrats have been demanding both spending cuts and tax increases.

Although Finance Malaysia reckons that the Congress would pass the bill to increase debt ceiling, let us analyzed and prepare for the unfortunate outcome. What if the debt ceiling limit is not raised by 2nd August?

1. US bondholders will get paid first, while other payments such as social security, military payment, and Medicare services will stall.
2. Downgrading by rating agencies is unavoidable, which will lead to an increase in Treasury's borrowing costs.
3. US will be losing its AAA ratings, damaging the important role of USD as one of the world's preferred currency.
4. USD will slump to yet another all-time low, while Gold price will recorded yet another all-time high
5. Commodities prices traded in USD will shoot up.
6. Inflation rate in Emerging Markets will pushed up by rising resources and food prices.
7. Hence, this will dampen the growth of the economy and China being the world's growth engine will stall by high inflation, lower domestic consumption.

It's such a nightmare for the world's economy. Anyway, Finance Malaysia thinks that both Democrats and Republicans will reach a solution and pass the debt limit increase. Ultimately, who is going to blamed for if US default? Both sides of politicians, not only Obama. The world is just not prepared for such unfortunate events while recovery is just started.

3 Hints given by BNM (16 May 2011)

Bank Negara Malaysia (BNM) hiked the OPR by 25bps to 3% on 5 May as what some analysts said "Surprising". The OPR hike was a pre-emptive strike on inflation pressures as the output gap closes. Many analysts are expecting hikes to resume only in July as inflation remains largely supply side driven. However, BNM seems to act before demand pull pressures dominate and before the output gap turns positive. In our view, the OPR and SRR hike is indicating two things here.

Hints #1

Inflation is going to threaten the Malaysian economy in the near-term (at least). Recent increase in prices of petrol and sugar will further accelerate the numbers. With ongoing efforts by Government to reduce the subsidies, inflation numbers for sure will gone up.

Citi Research: Regional Policy Rates as at 10th May 2011

Hints #2

Related to inflation also, BNM is trying to reduce the increasing food and resources prices. If we can reduce the import price, by having a stronger currency, this would be a wise move. So, BNM is trying hard to cramp down our money spent on these import items. Not by reducing the quantity of imports, Malaysia are buying at a cheaper price. How to that? Of course, by raising the OPR rates, which will lead to a stronger currency RM.

Citi: Regional Currency Performances as at 10th May 2011

Hints #3

Maybe, BNM foresees that Malaysia economy is going to face some real challenges (Asian financial crisis?). If the situation really turns bad in a year or two, how are we going to reduce the rate to spur economy given the current low rates? We must have room for BNM to decrease the rate by that time. That's why BNM so pro-active now?

My First Home Scheme: Home of Trouble Ahead?

Once again, to address the affordability issues of properties, MyFirst Home Scheme (My1st) was launched by government on 8th March 2011. Thanks for addressing the problem faced by young Malaysians working adults. But, does it really worth to even think about the scheme?

Of course, owning a house at young age is a good start to family planning. In fact, we're living in a society where buying a new house tights closely to starting a family. But, this is not necessary a MUST to everyone of us. We must do proper planning before committing for such a long-term loan with such huge amount. Buying a house is not buying an iPad or iPhone.

Only apartments are likely with less than RM220,000 price tags in Klang Valley now

Highlights of My First Home Scheme...

• For those earning less than RM3,000 monthly
• Working in private sector
• Confirmed employees with a minimum of 6 months in the job
• Joint applications are allowed (both in private sector and are family members)
• 100% loan financing for first house purchasing
• Eligible houses: Between RM100,000 and RM220,000
• Both under construction or completed properties
• Repayment period of up to 30 years
• Monthly loan repayment must be < 1/3 of applicants' monthly gross income
• 25 participating banks / financial institutions

Burning questions to participating banks...

1. Does the participating banks offering the same rate as currently practiced?
2. Does the banks really allocate sufficient funds for such loan?
3. Would the bank perform stricter credit checks since many borrowers are young and categorized as higher risk group?

Burning questions to borrowers...

1. Are there any houses out there you still think that is not overvalue? Still berbaloi?
2. Assumed that you found one, does it fit into your desired picture? Safe surrounding?
3. Assumed that you also found one, are you quick enough to snap it?

"Trouble Ahead"?

Assuming that loan rates as BLR-2.2% (BLR currently is 6.30%) and a 100% loan amount of RM220,000, the monthly loan repayment is RM1,063. If an eligible guy take the loan with maximum salary of RM3,000 allowed, the take home pay after EPF deduction was RM2,670 only. This translates into 40% of net income!

Example calculations of monthly loan repayment

Do not forget the legal fees, stamp duty, fire insurance, MRTA, cukai pintu, cukai tanah and renovations fees! I think most of our fresh graduates will buy a new car first. Assuming that the car loan installment is RM500 monthly, this would add up to 58% of net income!

To make trouble bigger, please take note of the changing interest rate environment, which means the BLR would possibly revised upward in the future. Then, your loan repayment will be adjusted higher accordingly. Can you afford your loan repayment then?

Related posts:

3 Wrong Perceptions on Malaysia Properties

70% Loan to Value (Nov 2010)

Why China Raised Interest Rate? And, what's the effect?

Extractions from BNM monetary policy statement

As expected, Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 2.75% yesterday. This was the 3rd time in a row that BNM left it unchanged. Are there any hints by BNM on Malaysia's economy this year? We can explore the "hidden messages" from the monetary policy statement as below:

Regional Front:

• While advanced economies continue to register modest growth, most emerging economies have experienced strong growth.
• For Asian region, domestic economic activity continues to support the growth momentum amid weaker external demand.
• Shifts in global liquidity have resulted in significant capital flows into the emerging economies, in particular, Asian region, and have brought with it risks to macroeconomic and financial stability.
• The region is also being affected by global inflationary pressure arising from the higher commodity and food prices.

On Malaysia:

• Recent indicators point towards a sustained expansion in private sector activity.
• External demand, however, was affected by the slower global growth.
• Malaysian economy is expected to grow at a steady pace in 2011, underpinned by continue firm expansion in domestic demand.
• Private consumption will be supported by sustained employment and income growth.
• Private investment activity will be supported by domestic-oriented sectors and the expansion of new growth industries.

 On Inflation:

• Domestic headline inflation rose towards the end of 2010 albeit remained low at 2.2%.
• The increased was mainly on account of higher food and energy prices.
• Prices are expected to increase at a modest pace in the coming months, driven primarily by rising global commodity and food prices.
• The assessment is that inflation will continue to be driven by supply factors with limited evidence of excess demand exerting pressure on prices.

BNM Conclusions:

• BNM considers the current monetary policy stance as appropriate and consistent with current assessment of the economic growth and inflation prospects.
• The stance continues to remain accommodative and supportive of economic growth.
• Going forward, additional policy tools such as the statutory reserve requirement (SRR) and macro-prudential lending measures may be considered to avoid the risks of macroeconomic and financial imbalances.

Finance Malaysia view:

• We expected inflation to rise at a faster pace in 2011
• BNM to continue hiking interest rate in second-half 2011
• OPR potentially be raised by 50-75 basis points to 3.25-3.50%
• Bank's loan growth will slow if SRR was raised

Source: BNM website

For full BNM monetary policy statement, click here.


Related posts:
70% Loan to Value
How BNM OPR hiking affecting the market?

New Fund: CIMB-Principal Strategic Income Bond Fund

Post-financial crisis, bonds remain the preferred asset class for more conservative investors because it is less volatile than equities. Asia, for example, remains a sound investment destination with rapid urbanization as a younger and higher population growth will necessitate greater infrastructure spending in the coming years.

To provides the golden opportunity, CIMB-Principal Asset Management Bhd has launched a new fund, that allows investors to capitalise on Asia, Australia, New Zealand and Middle East's improving credit conditions given the high potential of more rating upgrades.

"The demand for high-quality bonds in these targeted countries continues to remain high given the low interest rates outlook in the US and Europe, and this should support bond prices for the next few years. In addition, the slower economic recovery of these developed markets is shifting investment appetite to Asia. Combined with the likelihood of bond rating upgrades, this will mean potential good returns for investors who want to invest in regional high growth prospects in a stable manner." said Campbell Tupling, chief executive of CIMB-Principal Asset Management.

More about the fund....

This is a close-ended fund that aims to provide regular income and capital preservation through investments in predominantly bonds and other fixed and floating rate securities.

What's the strategy?

Generally, the fund adopts a buy-and-hold strategy by investing 70%-90% of its NAV in a diversified portfolio of bonds and other fixed and floating rate securities issued by governments, government agencies, supranational organizations and corporate issuers. The fund may also invest in structured products and/or derivatives, in which the underlying are linked to the above mentioned securities.

What's the bonds/securities rating you're looking at?

The fund may invest in investment grade securities and high yield securities, subject to a maximum 40% of its NAV in securities rated below "Baa" by Moody's or equivalent rated by S&P and Fitch.

The fund is suitable for investors who:

• have 3 years investment goals
• are not planning to have access to their money in the next 3 years
• are seeking exposure to investment opportunities in fixed income securities

Source: CIMB-Principal

Click here to download prospectus

 

Related post:

New Fund: CIMB-Principal Australian Equity Fund

Questions created by PTPTN

Today, it marks a historic milestone for my PTPTN's loan. After waiting for a year since the day government announced that it will reduce the interest rate from 3% to 1%, all the borrowers' wish finally came true.

I am very pleased with the announcement, though, it should be more effective. Understandably, there are thousands of borrowers who had taken up the education loan. However, did PTPTN file and store those record in a systematic way? If so, why would it take so long?

Right after the announcement, many of us (loan takers) curiously thinking about the procedure, terms and conditions applies, and of course, when would it started. Then, I believe many of us can't wait anymore, and take the first step by ringing up to inquire about the issue.

Personally, I did called. Surprisingly, the official politely told us that NOT everyone are entitle for the reduced 1% interest rate. The term was: "Qualified borrowers is meant for those who regularly repay the loan for the past 12 months".

Fortunately, I am one of those qualified borrower (I think). However, there was a lists of questions?

What does 'regularly' mean? Repaying 3 months in one shot, can?

This is because there is a transaction fee each time we repay loan. Hence, many of us prefer to repay in one shot, albeit bigger amount, to reduce our costs and avoiding the monthly hassle.

The reduced rate is on the outstanding loan amount?

This would be unfair for those who regularly repaying a certain amount, as we are serving interest only initially. If this is the case, what's the incentive for us to repay early previously?

Until now, we still are unsure about the entitlements and the procedures, if any.

Conclusion was clarifications from PTPTN are very much needed here. Not because we don't want to repay, in fact, we need the assurances given by PTPTN.

China's banking stocks... Your next destination?

While Malaysian market is hovering around 1,500 points, a ground survey shows that local investors are skeptical about the sustainability of our market. Bursa Malaysia's website shows that local retail participation is merely at 25% daily.

Maybe, we could look aboard to find some other investing options. And, China's banking stocks could suit investors appetite for the following reasons:-

1. China was an under-performer this year
2. China's banks should report better profits
3. Robust loan demand

Due to the higher interest rate being announced recently, banks of China should experienced expansion of net interest margin for the next few quarters. Although loan growth is moderating now, it was still high, and will continue as long as China's economy is growing. We can't deny that China is the world's engine of growth currently, in which we persist for the next few years, at least.

Will China raise rate again?

Depending how fast and big the housing bubble was, China would continue it's monetary tightening policy going forward. In contrast, Malaysia had raised interest rate 3 times this year, albeit small percentage, China is lagging us although with a more serious property bubble.

However, there are risks involved.

1. Banks could be facing liquidity problem
2. Potential of loan defaults
3. Huge loans allocated to local government's infrastructure projects

In order to minimized risks, investors should favor BIG lenders (pic) and avoid smaller banks, given their greater capital sufficiency.

Why China raise interest rate? And, what's the effect?

Yesterday, China surprisingly raised its interest rate by 0.25% as follows:

- 1 year lending rate from 5.31% to 5.56%

- 1 year deposit rate from 2.25% to 2.50%

Why China raise interest rate?

1. To cool down the over-heating property sector.

2. Combat inflation

3. Low liquidity in the banking system

While inflation was hovering around 3.5% currently, even though the deposit rate has been raised, the net real interest rate is still in negative territory (3.5% - 2.5% = -1.0%). This is one of the main reason why Chinese were going all out to invests, especially in real-estate, due to its low yield if sitting in the bank (even lower than Malaysia).

However, China would be facing another problem...

Raising interest rate would attract capital inflows, which could dampen the purpose of containing inflation. Foreign investors view Chinese renmimbi as undervalue, mainly due to interventions by Chinese government. The latest news could ignite a fresh round of thoughts, worsening the current situation, pushing renmimbi higher and faster.

In fact, China should target it's main problem specifically - real estate. Inflation there is mainly caused by high flying properties prices. Hence, measure such as property gain tax should be introduced first, before raising interest rate, to avoid further attracting inflow of hot-money.

Affecting Malaysia?

Given that China is one of the largest trade partner with us, Malaysia could see a surge in capital inflow also. In fact, the whole region will experience the same fate of stronger currency, making our export to western countries more expensive. Anyway, I believe that we can offset the negative effect with China being the largest commodities / resources consumer, which supplied by Asian countries.