A slew of weak Chinese numbers shows the region is stalling
Japan slashed its second-quarter growth estimate on Monday
South Korea unveiled a fresh round of $5.3 billion fiscal stimulus
Much of the weakness came from Europe, China's biggest trading partner
Japan slashed its second-quarter growth estimate on Monday while South Korea unveiled a fresh round of fiscal stimulus, underscoring the vulnerability of both economies to a slowdown in China, their most important trading partner.
A slew of weak Chinese numbers on Monday and over the weekend confirmed that the world’s second-largest economy is itself suffering from muted demand in the US and Europe, and is struggling to find the right policy measures to address it, ahead of a once-in-a-decade leadership transition later this year.
China’s imports dropped 2.6 per cent in August from a year earlier, while exports increased just 2.7 per cent according to figures released on Monday. The export growth was higher than July’s 1 per cent rise but far below the double-digit growth rates that China has become accustomed to over the past decade.
Much of the weakness came from crisis-hit Europe, China’s biggest trading partner, with exports to the EU falling almost 13 per cent in August from a year earlier.
Weakening trade figures are a big concern for China, where export-oriented industries employ an estimated 200m people and where the economy is already expected to expand this year at its slowest rate since 1999.
“The answer to the key question, will China bounce back and rescue everyone like in 2009, is ‘no,” said Dong Tao, chief regional economist at Credit Suisse in Hong Kong, pointing to the lowest Chinese industrial-production numbers in three years in August and falling investment in fixed-assets.
“China is facing structural problems that counter-cyclical remedies cannot fix,” he said. “The private sector cannot find areas to make enough profit to justify its investment.”
The Chinese government has taken steps to prop up growth by approving a number of new infrastructure projects across the country. Some economists expect to see further measures, such as tax breaks for labour-intensive industries such as textiles, luggage and clothing, and a renewed determination to keep the currency stable against the US dollar.
But unlike in 2009, when a huge Rmb4tn stimulus package appeared to come with the firm backing of the State Council, there are now signs of dissent among different factions, said Shen Jianguang, chief Asia economist with Mizuho Securities.
“The government has started to recognise that there is a risk of a hard landing, but this time there is no strong message from the top,” he said, noting tensions between the growth-focused National Development and Reform Commission, China’s top planning agency, and a central bank worried about inflation risks.
The effects of China’s stalling were evident in a sharp downward revision of second-quarter gross domestic product figures in Japan on Monday, raising fears that the world’s third largest economy is heading for at least one quarter of contraction in the remainder of the year.
Japan’s output increased by 0.2 per cent between April and June, lower than the initial reading of 0.3 per cent, after weaker readings in inventories, government spending and private-sector investment.
Meanwhile, the South Korean government responded to weak recent export data by unveiling $5.3bn of new fiscal stimulus measures, three months after a package worth $7.5bn.
The Bank of Korea may be poised to make a quarter-point cut in interest rates later this week, say economists, following a similar cut in July.
And in Japan, expectations are rising for further monetary stimulus – especially if the US Federal Reserve moves next week towards more quantitative easing, causing the yen to strengthen further against the dollar.
“Whatever effectiveness in monetary policy remains, the Bank of Japan should try to exploit till the very end,” said Frederic Neumann, co-head of Asian economics at HSBC.