- Even before the yuan weakened, China was eating Asia's lunch
- Battle for market share may become more intense as pie shrinks
Even before Aug. 11, China was threatening to snatch market share from other Asian competitors in the key U.S. and European export markets.
Then the outlook for China’s Asian competitors worsened as the shock yuan devaluation loosened a dollar link that had kept the unit strong even while the currencies of most Asian competitors had weakened. All of a sudden, prospects for easy competitive gains versus China from currency depreciation had ended.
"China’s move signaled loud and clear that there are limits to its willingness to absorb global deflation pressures as other currencies depreciate," said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. "Some countries are even facing a triple whammy of slowing growth in their biggest export market, an onshoring of the supply chain, and increased competition in other export markets as China moves up the value-added chain."
Those risks were highlighted in August data. Tuesday saw China reporting August imports slumped 13.8 percent while exports dropped 5.5 percent. A day earlier, Taiwan said exports for the same month had plunged 14.8 percent, while South Korea last week announced shipments had slumped 14.7 percent.
Economies that will encounter the strongest headwinds are those with the highest export exposure to China including Taiwan, Malaysia, and Singapore; those that compete with it such as Thailand and Vietnam; and countries that are mainly commodity exporters like Indonesia, Loevinger said.
“The export-oriented economic model pursued by Taiwan and Korea has resulted in both countries being vulnerable to swings in the global economy,” analysts at BMI Research wrote in a note issued Wednesday. “The growth of regional supply chains has led to the steady integration of both Taiwanese and South Korean economies with the Chinese one. While this resulted in significant benefits during China’s period of rapid growth, heavy exposure to China has also led to a sharp decline in export growth as the Chinese economy slows down.”
Weakening demand in China also means an increased possibility it will export excess industrial capacity and deflationary pressures, according to a note from Credit Suisse Group AG’s London-based strategist Richard Kersley. China’s manufacturers, which are dramatically upgrading into sectors including autos and robotics, are also more comfortable than competitors in accepting lower returns and thinner margins, he said.
"For Asian nations exporting towards China, it may be a rough time," said Herald Van Der Linde, head of Asia-Pacific equity strategy at HSBC Holdings Plc in Hong Kong. "The ASEAN countries have been able to gain competitiveness by depreciating their currencies against a relatively strong Chinese currency. That has changed now."
As China shifts up the value curve, more products it used to outsource to neighbors are now being made domestically.
China supplied 28.5 percent of robots in its home market last year, compared to 12.2 percent in 2012, according to Credit Suisse. The shift is set to continue with the nation’s "Made in China 2025" plan aiming to source 40 percent of key components domestically by 2020 and 70 percent by 2025.
Global trade volumes weakened in the first half, falling half a percent in the second quarter and 1.5 percent in the first three months, according to the CPB World Trade Monitor.
"Global trade has collapsed," said Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP. "Fighting for shares of the shrinking pie might become more intense."
Still, China’s competitiveness is facing headwinds on other fronts as a shrinking workforce and rising wages squeeze domestic manufacturers. This year, nations including Vietnam are outperforming China in the U.S. market.
And while the yuan has weakened since Aug. 11, it’s unclear how much further policy makers will allow it to slide. The yuan exchange rate is close to stabilizing and there’s no basis for long-term depreciation, People’s Bank of China Governor Zhou Xiaochuan said in a weekend statement following a meeting of Group of 20 central bankers and finance ministers in Ankara, Turkey.
Because Asia’s production chain is closely integrated, any boost to China’s exports from yuan depreciation will also benefit other regional countries, Zhuang Juzhong, deputy chief economist at the Asian Development Bank in Manila, said in a telephone interview.
Northeast Asia is the most vulnerable to yuan devaluation because China is moving into low- and medium-technology industries including computers and telecommunications where countries like Taiwan and South Korea are competing, said Chua Bin Hak, an economist at Bank of America Merrill Lynch in Singapore. In Southeast Asia, Singapore and Malaysia are the nations with a large share of electronics products in their exports, he said.
"Even when the renminbi was anchored, China was actually eating the lunch of the rest of Asia in the U.S. and Europe markets," Chua said. "A slowdown in trade that started with the commodities cycle risks broadening out to non-commodities."
— With assistance by Kevin Hamlin