By John Richardson
EVIDENCE that decoupling might be a myth has grown with the release of China’s September export data.
Exports to the ASEAN (Association of Southeast Asian Nations) region fell 9.8% by value in September 2013 compared with the same month in 2012.
Part of the explanation for the decline is the “over-invoicing” fiddle which distorted export data on the upside in September of last year. Dodgy companies used to exaggerate sales in order to smuggle funds into China so that they could speculate on the Yuan, as there were widespread expectations that it would strengthen in value against the US dollar. But from May this year, the government has clamped-down on this practice.
But economists believe that this doesn’t fully account for the decline in shipments to ASEAN. The more important reason for the decline in exports to ASEAN they think, is that the threat of Fed tapering has led to a slump in economic activity across the region.
This underlines our argument that in countries such as Indonesia, growth models are seriously flawed. Cheap Fed credit has delayed economic reforms in ASEAN that are essential for sustainable growth. Time might now be running out for these reforms, as cheap credit could soon come to an end.
If you dig deeper into the export data, you can find support for this argument. Average export growth to ASEAN, year-on-year again, was 26% in July-August 2013. This suggests that in real non-fiddled terms there has been a sharp decline – as July-August 2012 would also have been distorted on the upside.
The polypropylene (PP) market backs up the notion that economic activity in Southeast Asia has weakened.
“Southeast Asia’s PP import prices were assessed as stable to lower amid lacklustre demand,” wrote my ICIS pricing colleague Chow Bee Lin, in her price assessment for the week ending 11 October.
“Buying power remains weak in the region because of the recent depreciation of several regional currencies against the US dollar.
“PP prices in Indonesia were also weighed down by high inventories among local stockists.”
The non-realists might, however, dig further into China’s September export data and point out that September exports to the US rose by 4.2% in September. Although this was slower than the 6.1% increase in August, it is still a very respectable performance.
If decoupling no longer holds as a theory, how about a resurgent West supporting Chinese growth – and perhaps emerging market growth in general? In other words, what about a re-coupling?
But what about the impact of the US debt crisis on consumer demand? We will only know in October, of course, but even if a deal can be reached on raising the debt ceiling, there is bound to be a negative effect.
A further short-term concern is that the peak manufacturing season – when China imports bigger volumes of chemicals and polymers in order to produce finished goods for export to the West in time for Christmas – is now over (it runs from July until September).
And China’s September exports to the European Union fell by 1% after increasing by 2.5% in both July and August.
Longer term, also, the West has more than its fair share of deep, structural economic problems that have yet to be addressed.
The non-realists could again, though, scan China’s September trade data and conclude that the economic rebalancing of its economy is already delivering major benefits.
They might point out that September imports rose by 7.4%, narrowing China’s trade surplus to unexpectedly low US$15.2bn – a sign that domestic consumption is rapidly replacing exports as a driver of growth.
Thus we come to Theory Number 3: It doesn’t really matter what happens in other emerging markets and the West, as China’s enormous potential for much-greater local consumer spending is now being realised.
But the composition of imports worries us.
For example, iron ore imports were up by 14.7% to a record high (this is reflected in the rise of China’s crude steep production – see the above chart).
China imported 1.27m tonnes of polyethylene (PE) and PP in September, up by 4.8% from the previous month, local traders told ICIS.
Compared with official August numbers, the estimated September PE imports were up by 1%, while PP imports grew 12.4%, the traders added.
“Demand is being pushed up by the government. It’s infrastructure that’s using all these raw materials,” Fan Zhang, an economist at Brokerage UOB told the Wall Street Journal in this article.
And the WSJ added, in the same article: “Although Beijing has signalled it wants to keep a tighter rein on local government spending plans, it has given the green light to a batch of new subway projects and has held-off from fresh curbs on the property market over the past few months.”
The reason is that China’s leaders are anxious to achieve a stable economic and therefore political ship ahead of the November plenum meeting.
This is supported by September lending figures as they were higher than analysts’ estimates.
“Chinese banks made 787 billion Yuan ($128.6 billion) worth of new Yuan loans in September, higher than a forecast of 650 billion Yuan and more than the previous month’s 711.3 billion Yuan,” wrote Reuters in this article.
At some point after the November plenum this will have to stop as rebalancing gets going in earnest. This will quite likely be a painful, uncertain and difficult process.
As a result, there is a risk - as we discussed yesterday - that de-stocking down many chemicals and polymers in China might happen once the November plenum is finished, as inventories may prove to be in excess of future needs.
“Investment in inventories must fall sharply, since its level depends on the growth of an economy, not on the level of activity,” wrote Martin Wolf in this article on China in the Financial Times in July.
“Think about it: in a stagnant economy, inventory accumulation would normally be zero. Again, other things equal, an economy growing at 6% would need 60% of the investment in inventories of one growing at 10%.
“The immediate impact of this adjustment would be a sharp decline in investment in inventories, before their growth resumed at 6% a year, from the now lower level.
“Moreover, businesses might well fail to anticipate the economy’s slowdown altogether, particularly after years of far higher economic growth. They would find themselves burdened with rapidly rising inventories and would then be obliged to slash inventories, and so levels of output, even further.”
A further concern is that this year’s renewed economic stimulus – driven perhaps by partly political rather than entirely sound economic reasons – will make the eventual adjustment to lower stock levels that bit more painful.