FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below are two excerpts from this week’s edition highlighting outlooks for countries in Asia Pacific in H2 2019.
Taiwan and South Korea Are Most Vulnerable to US-China Trade War
Both South Korea and Taiwan’s exports remained weak in June. Both economies are highly vulnerable to external shocks, with exports equivalent to 55% of Korea’s GDP and 60% of Taiwan’s. China’s slowdown and US-China trade tensions are having an outsized impact on these two economies, with China the destination for 30% of Korea’s exports and around 40% of Taiwan’s. Both economies are highly integrated with China’s supply chain: 80% of Korea’s total exports to China are in intermediate goods, many of which end up as finished products destined for the US. For every drop in China’s exports to the US, Korea’s shipments to China are estimated to drop by half.
With net exports a major contributor to both economies’ real headline growth, disruptions in external demand will continue to cloud South Korea’s and Taiwan’s domestic sentiment as manufacturers delay investments and postpone wage increases, and cautious households rein in their spending.
Firms should orientate their sales focus away from both these economies’ export-driven sectors and more towards those sectors that will benefit from government stimulus measures. South Korea’s government has promised to focus on stimulus investment and consumption in H2. Its program includes tax deductions on facilities investment, the expediting of construction projects, worth a total of 8 trillion won ($6.8 billion) and an increase in purchase limits at domestic duty-free stores. Taiwan’s government has embarked on rapid infrastructure spending and the introduction of stimulus for domestic travel, purchases of energy-saving home appliances, and urban renewal.
Josef Jelinek, Senior North-East Asia Analyst
FrontierView clients: See our most recent China Quarterly Market Review for further insights
Gloomy Outlook for Private Sector Financing in China
China’s total debt to GDP ratio continued to increase this year. however, non- financial corporate debt levels fell, highlighting credit strain in the private sector. Financing for small and medium sized enterprises (SMEs) in China has been tight despite the government’s reserve requirement ratio rate cut and efforts to inject liquidity into the private sector. Higher borrowing cost, the deleveraging campaign, investors’ lack of credit risk discretion, and slower growth in China have led to an uptick in debt default rates.
The government has eased the pace of tightening shadow bank lending, but the economic slowdown has eclipsed the quality of assets in these financial institutions. The private sector in China will, therefore, continue to struggle with access to credit, as rising default risks have made investors even more cautious about lending. In H2, the government has little room to maneuver, as it is expected to walk a thin line between funneling credit into the private sector through targeted fiscal stimulus and easing, and not completely rolling back the progress of deleveraging.
Executives should manage their expectations for the China market this year. The private sector, facing a credit crunch, will be constrained to increase investment or expand production. Weaker private investment will also weigh on employment and wages, dampening consumer spending.
Boyang Xue, Analyst for Northeast Asia