China’s new econ­omy is hit­ting Asia’s ex­ports

The Pak Banker - - BUSINESS -

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.

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