Strong currencies are starting to hurt Asian economies

MANUFACTURING data painted a mixed picture of economic activity in Asia, with strong currencies hurting exporters in South Korea, Japan and Taiwan, while China surprisingly showed resilience amid fears tighter regulations might slow growth.

The Lunar New Year holidays disrupted activity, suggesting that the slowdown in some of the economies could be temporary.

Worries remained that the dollar’s broad weakness could hinder the region’s export-driven economies, though manufacturing surveys in the US and Europe later yesterday were expected to confirm the strong momentum in global trade.

Also, the full impact of China’s crackdown on risky financing is likely yet to be seen.

Japanese manufacturing expanded at a slightly slower pace in February as a stronger yen weighed on new export orders and Taiwan’s factory growth was the slowest in four months, although both economies still posted relatively solid numbers.

South Korea’s export growth slowed in February to its weakest in more than a year.

The Japanese yen is trading around its strongest in more than a year, the Korean won in more than three years and the Taiwanese dollar in more than five.

“For Asia, the strength of the currencies will have some impact, but generally how growth in the G3 economies fares is more important,” said Khoon Goh, head of Asia research at ANZ.

“We should continue to see a strong momentum in exports going into the second half, when base effects come into play,” Goh said, cautioning against reading too much into the holiday-distorted numbers.

In the absence of any signs of an acceleration in growth, however, markets remain of the view that central banks in Asia will significantly lag the Federal Reserve in hiking rates this year.

US Federal Reserve chief Jerome Powell, in his first public appearance since talking the helm at the US central bank, said this week that he aimed to prevent the economy from overheating, cementing market expectations for three or four interest rate increases this year.

Chances for rate hikes in Asia are far fewer.

Bank of Japan (BoJ) board member Goushi Kataoka cautioned yesterday against a premature exit from the BoJ’s ultra-loose monetary policy and called for a ramping-up of the bank’s massive stimulus programme.

In China, a private survey showed yesterday factory growth at a sixmonth high, but the findings were largely at odds with downbeat official activity readings on Wednesday, which raised concerns that tighter regulations might lead to a sharper slowdown in the world’s second biggest economy.

The divergence might be explained by the fact that the private survey captures more of the activity of small and medium firms in the private sector, while the official survey focused more on large state-owned enterprises, analysts said. The state-owned firms service the domestic demand more and their weaker showing may point to weakness stemming from property-cooling measures, higher interest rates and tougher rules against risky financing, factors which are expected to weigh throughout the year.

Government measures to reduce pollution over the winter have also led to cuts in production, economists said.

“The big picture is that while the survey data have generally been strong during the past year, we don’t expect that strength to be sustained in coming quarters,” said Julian Evans-Pritchard, senior economist at Capital Economics.

ING analysts were more upbeat, however, pointing to the fact that even the weaker private survey showed manufacturers’ expectations of future activity were still solid.

“These numbers imply that the low reading is likely driven by holiday effects, rather than by any underlying slowdown in coming manufacturing activity,” said Iris Pang, Greater China economist at ING.

In smaller economies, Vietnam’s activity was at a 10-month high, Indonesia’s was at a 20-month high, while Malaysia’s contracted.

Government measures to reduce pollution over the winter have also led to cuts in production, economists say