The first weeks of 2014 showed North Asia’s manufacturing and export giants enjoying mixed fortunes, with South Korea and Japan starting the year positively, while China, the biggest of the trio, was still struggling to regain momentum.
Asia’s top export powers, which together account for a fifth of global economic output, expect to get a lift this year from anticipated U.S. and euro zone recovery and better global growth in general.
Yet, a survey released on Thursday showed factory activity in China turned negative in January for the first time in six months, after gross domestic product data released earlier in the week raised prospects that growth in the world’s second largest economy will sink to a 15-year low this year.
China’s economy is passing through a difficult period as the new Communist Party leadership, in charge for just over a year, re-calibrates priorities.
“They are in the middle of a reform right now to fix shadow banking ... to open markets to the private sector,” said Kyoya Okazawa, head of global equities and commodity derivatives in Tokyo at BNP Paribas. “In the middle of those reforms, those PMI (purchasing manager index) numbers are going to be quite bumpy.”
Things appear to be going better with China’s neighbors.
“Compared to Japan and China, which are dependent more on domestic consumption for growth, South Korea will likely benefit more from the recovery in the advanced countries,” said Kim Sang-Hoon, fixed income analyst with Hana Daetoo Securities in Seoul.
South Korea is the most open economy of the three with exports worth nearly 50 percent of GDP, while China’s amount to about half of that and Japan’s account for about 15 percent.
Going By Numbers
South Korea could lose some of its advantage to Japan, due to the yen’s sharp decline over the past year against all major currencies, including the South Korean won.
Some economists tip Japan to benefit the most from a recovery in the West. That has already made South Korean automakers Hyundai and Kia predict their lowest sales growth in a decade this year.
Regardless of the challenges, South Korea’s economy grew 0.9 percent in the final quarter of last year and 3.9 percent year-on-year, the fastest expansion since early 2011 and data released this week showed solid growth in exports in the first 20 days of January.
In Japan, a Reuters survey showed business sentiment improved further in January as a result of Prime Minister Shinzo Abe’s blend of hefty monetary stimulus and fiscal pump-priming, though a consumption tax rise due in April weighed on the outlook.
Meantime, China, the world’s long-time growth engine, continues to stutter. GDP data on Monday showed 2013 growth of 7.7 percent, raising expectations that 2014 growth will slip to a 15-year low somewhere above 7 percent.
On Thursday an early reading of the Markit/HSBC Purchasing Managers’ Index fell to 49.6 in January, dropping below the 50 line which separates expansion of activity from contraction, pushing down Chinese equities, and the Australian dollar because of Australian exporters’ reliance on Chinese demand.
Despite different starting positions, the trio enters 2014 with an ambition of boosting domestic consumption and reducing their reliance on exports.
For the new leadership in Beijing it is part of a grand rebalancing plan as the old growth model, driven by heavy investment in export-related capacity and infrastructure, is unsustainable.
For Tokyo, spurring more consumer spending is an essential part of its campaign to end a 15-year phase of deflation while Seoul counts on private demand to make up for a planned reduction in government spending.
Though the International Monetary Fund raised its global growth forecast this week, with advanced nations leading the way, the outlook is littered with uncertainty.
An export boost from Western Hemisphere upswing cannot be taken for granted. Markets have to see how the U.S. economy responds to the Fed’s gradual withdrawal of monetary stimulus.
In China, latest data showed growth remained as skewed as ever towards investment despite the authorities taking steps to reduce availability of cheap credit.
The authorities also have yet to tackle weak social safety net and inadequate health and pension coverage that encourage savings and act as structural impediments to more consumption.
In Japan, there is uncertainty how consumers will respond to the sales tax increase, the nation’s first since 1997 and whether thousands of smaller firms can follow blue chip companies in raising wages, which is necessary to sustain consumption.
For its part, South Korea needs to continue working through its household debt pile, which can weigh on spending, particularly if the Fed’s unwinding leads to higher borrowing costs worldwide.
“Reforms will be a key theme for Asia in 2014,” said Ronald Man, HSBC economist in Hong Kong. “While our China economists note that some measures are likely to involve short-term pain, they stress that the broad reform agenda can help unleash pent-up private sector demand for investment and consumption.” (Reuters)