Sunday, June 13, 2010

I understand why Asia's worried about Europe

On the forefront of the Chinese economic releases this week was the trade data, where headlines shouted +48.5% Y/Y export growth in May. This report didn’t go unnoticed in Washington, as renewed obsessions with the Chinese peg against the US dollar fired up again.

But the Chinese release overshadowed the Philippines April trade report, which in my view, illustrates more transparently the slowdown in external demand that is likely underway across the region. In the Philippines merchandise exports increased 27.4% over the year in April, which was half the rate of the Bloomberg consensus and that in March, 42.7% and 43.8%, respectively.

A negative export growth trend has been established - explicitly in the Philippines and likely going forward in China (see Goldman Sachs report below). And these countries have strong trade ties with Europe - the Eurozone was 15% of 2009 world GDP (PPP value) according to the IMF.

Therefore, recent nominal appreciation of the Philippine peso and Chinese yuan against the euro, and expected real appreciation - Europe's self-imposed economic contraction stemming from harsh fiscal austerity measures will drag prices downward - may very well hamper the economic recovery for key Asian economies via the export channel.

Export growth in the Philippines has been slowing to top trading partners.

The chart illustrates the contribution to overall export growth from the Philippines six largest trading partners - together these countries account for roughly 50% of total exports. The contributions to the Philippines export income growth has been slowing or flat for some time to China, Singapore, and Germany. Slightly more worrisome is the Netherlands contribution having turned negative for two consecutive months.

The Netherlands and Germany account for roughly 13% of total export demand from the Philippines. The euro has depreciated 8% against the Philippine peso since April 2010 (through June 11 and see chart below), and the lagged effects of the nominal depreciation will continue to pass through to exports.

In China, though, a resurgence of export growth among its top trading partners bucks the trend seen in the Philippines.

The chart illustrates the contribution to overall export growth from China's six largest trading partners - again, these countries jointly demand roughly 50% of total Chinese exports. China’s May report was indeed strong: the US added a large +8.3pps to overall Chinese export growth in May, and Hong Kong contributed another robust +6.2pps of growth. In contrast to the Philippines April numbers, The Netherlands contribution to Chinese export growth remained strong, contributing 1.5pps in May.

Chinese exports are quite volatile in the beginning of the year. I suspect that Yu Song and Helen Qiao at Goldman Sachs are right, that export growth will initiate its trend downward starting in June:
“We believe the very strong exports growth in May is likely to be a temporary phenomenon, much like the very weak exports data recorded in March, and expect June data to show a visible normalisation,” said Yu Song and Helen Qiao at Goldman Sachs.
In their Goldman report (no link) Yu Song and Helen Qiao argued that the Chinese numbers remain clouded by the following distortions:
  • "The exports acceleration was likely to be partially induced by a potential cut to the export VAT rebate for some commodity exports: There have been a number of domestic news reports that this might happen soon as a part of the broader policy package to reduce pollution and energy consumption.
  • But it probably also reflected changes in the domestic economy: Our proprietary GS Commodity Price Index (GSPCC) (Bloomberg ticker: ALLX GSCP) suggest that the domestic prices of main commodities have been mostly trending down in May which might have encouraged more exports in this area.
  • Strong export activities might also be impacted by the Lunar New Year effects as many exporters resumed production after taking time off during the holiday season which often last for weeks. [although they say this cannot be validated until a further breakdown becomes available later this month]."
The recent nominal depreciation of the euro against the Chinese yuan and the Philippine peso, 11% and 8%, respectively, since April 1 2010, will pass through to both Chinese and Philippine exports at a lag. And further real depreciation - the nominal exchange rate adjusted for relative prices of goods and services - of the euro against the yuan and the peso is almost certain. Europe’s self-imposed fiscal austerity measures will crimp economic growth and deflation is bound to take over across Europe and relative to Asia.

As such, recent external shocks from Europe will likely show up Chinese and Philippine trade data in coming months. Doesn’t look good for Asia, especially for those economies like the Philippines and China for which exports provide a robust growth impetus.

We’re nowhere NEAR out of the woods yet.

Rebecca Wilder


  1. its not asia that should be worried; its europe...europe is already a demographic basket case...although it may take a dozen years for it to play out, what we're seeing now is the beginning of the transition to what will be the dominance of the BIICs on the world stage...

  2. The breakdown of the Pacific Rim's export partners is less interesting than say, the consolidated volume, and relative significance (vis a' vis the world's gdp in us dollars), of the Pacific Rim's exports.  Is there a doctor in the house?