China’s new economy is hitting Asia’s exports
The South Korean city of Ulsan, perched on the peninsula's southeastern tip, has long been a proxy for the health of the nation's export-driven economy.
Home to the world's biggest automanufacturing plant, a major shipyard and a large oil refinery, Ulsan has been a key engine of one of Asia's postwar growth stories. Now, the city is being held up as an example of something much less favorable -- how a deepening export slump is crimping South Korea's $1.2 trillion economy. With China as its biggest trading partner, Korea's export crunch is sending a warning shot to the world about the risks of slower growth in its neighbor's economy.
Shipments from Ulsan in 2015 sank to $75.6 billion, the lowest level since 2010. The city's chamber of commerce responded by freezing some of their employees' salaries for a second year to "share the pain" being felt at its member companies across sectors including shipbuilding, auto manufacturing and petrochemicals. Take Korean cars: Shipments fell 21.5 percent in January from a year earlier, an even sharper decline than the month's 18.8 percent drop in total exports.
"With the big three sectors of Ulsan all in a slump, subcontractors to some of the big companies closed their businesses," said Choi Jin Hyeok, research team leader at the Ulsan Chamber of Commerce & Industry. "I'm afraid headwinds may continue this year. Slower growth in China is the biggest risk as the main market for all those industries is China."
The export malaise isn't unique to South Korea. Across Asia, shipments are tumbling -- in some cases at double-digit rates. In January Japanese overseas sales fell 12.9 percent from a year earlier and China's dropped 11.2 percent.
While some of this can be attributed to falling prices for commodities and energy, much of the decline is pinned on China's economy, which last year grew at the slowest pace in a quarter century. As about 68 percent of South Korea's shipments to China are of intermediary goods, a downturn in the Chinese economy squeezes demand for Korean exports.
Because China is exporting less of the goods it makes, the world's biggest trading nation is also buying less of the materials needed for its supply chain. Part of the problem is structural: China wants to shift its growth model from one centered on manufacturing to more of a focus on services and consumption. Korea isn't affected only by China's slower growth. Other big customers like the U.S. and Europe are importing less, too.
"Developed markets such as the E.U. and the U.S. are gradually grinding higher in terms of growth but they are not as responsive to imports due to changing consumption patterns in goods," said Trinh Nguyen, an economist at Natixis Asia Ltd. The outlook for exports in Korea isn't expected to improve much in the short run, owing to several factors.
"Korean exporters are coming under pressure from softer global demand and rising competition in China, and this was likely exacerbated this month by the lunar new year holiday period," Emily Dabbs, a Sydney-based economist at Moody's Analytics, said in an e-mail. "Low global commodity prices have also kept a lid on the import bill, with softer domestic demand likely adding to the decline this month." Creeping trade barriers also are posing obstacles. Simon Evenett, a professor focusing on international trade at the University of St. Gallen, estimates 476 trade distortions were introduced by governments last year.
Still, even as exports have slumped in Korea, Asia's fourth-largest economy posted 2.6 percent growth in 2015. The government and the Bank of Korea both forecast that the country's economy will expand at least 3 percent this year. Taimur Baig, chief economist for Asia at Deutsche Bank AG, describes the situation as trade stagnation.
"Asian economies are navigating through 2016 much the same way they did in 2015, facing waning domestic demand, exports, and credit momentum, underpressure asset markets, and continued drag from high household and corporate leverage," he said.
The export picture isn't entirely gloomy. The world economy, while slowing, isn't at a crisis point. Unemployment in the U.S., the world's biggest-consuming nation, is low. The outlook for Asian manufacturers remains upbeat with PMI export orders for Japan and South Korea expanding, according to analysis by Bloomberg Intelligence. There are a few bright spots in Asia: Singapore's economy grew more than estimated last quarter as a gain in services outweighed weaker manufacturing and exports.