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China’s export growth is striking — but is this as good as it gets?



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Hello from Hong Kong, which is now on its fourth wave of coronavirus and can perhaps stake a claim to having had the most waves of any major city. Fines have been increased and diners-per-table have been reduced, but overall cases remain low compared with the situation in Europe and the US.

Our main article today is about the relationship between coronavirus — including both its current and future waves around the world — and China’s striking trade performance over recent months. Policy watch focuses on UK prime minister Boris Johnson’s planned trip to Brussels for crucial trade talks and the main sticking points to a deal, while our chart of the day looks at big demand for storage freezers as Covid-19 vaccines are rolled out.

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Pandemic-related products fuel export boost

When China’s exports rose 9.9 per cent year on year in September, the country’s trade performance was looking pretty good. When they rose 11.4 per cent in October — the fastest rate in 19 months — it was looking even better.

So after November’s striking growth of 21.1 per cent, it’s worth asking the question: is this as good as it gets?

China’s dominance of global trade because of a pandemic that originated within its borders is one of the most unexpected consequences of the coronavirus crisis. It has been driven in part by exports of the kind of products that a world plunged into intermittent states of lockdown relies on, at a time when other exports have found it more difficult to adapt.

This gives rise to a high-level ambiguity. On the one hand, China’s strong trade data might be seen as a proxy for the recovery of global demand. On the other, it might be seen as a sign of the crisis persisting.

Ting Lu, chief China economist at Nomura, pointed out that exports of textile yarn and fabric products, which include face masks, rose 22 per cent year on year in November, while medical devices, including ventilators, rose 38 per cent — in both cases above the growth rate in October. He suggested this was “likely due to a second and more severe wave of Covid-19 in overseas economies”.

For products required by those working from home, the data point in a similar direction. Exports of home electrical appliances rose 62 per cent in November, compared with just under 40 per cent in October.

Container ships at a port in Shanghai. Instead of huge financial relief to maintain domestic demand, China opted for supply-side measures that helped expand industrial production
Container ships docked in Shanghai. Instead of huge financial relief to maintain demand, China opted for supply-side measures that helped expand industrial production © Qilai Shen/Bloomberg

The impressive gains come despite a continued strengthening of the renminbi, which on Friday touched its strongest level since 2018 and has added 6.5 per cent this year. The conventional wisdom suggests that a stronger currency would hurt exporters, but these are not conventional times.

The direction in which China’s exports are flowing is also telling. Despite well-documented tensions between the two countries this year, total exports to the US were up 45.5 per cent year on year in November — the highest growth rate since 2003 after adjustments for lunar new years. Exports to the EU were up 25.9 per cent. Export growth to Japan, where the virus is less rampant, was more muted at 5.2 per cent.

Mr Lu offered an insight that helped in part to explain this dynamic. He highlighted the “massive financial relief” in developed economies to maintain consumption demand and suggested that these policies, combined with seasonal demand, had helped prop up appetite for working-from-home and protective personal equipment. This contrasted with the situation in China, which he noted was the first economy to emerge from the pandemic, and where the government had opted instead for supply-side measures that had helped expand industrial production.

So what happens if the pandemic retreats? Tommy Wu, an economist at Oxford Economics, expects a rotation from goods to services consumption in 2021 as a result of wider vaccine availability. That, along with the one-off nature of many of the purchases, means he expects China’s export performance to be less impressive next year, even though a recovery would continue to support growth.

HSBC’s Erin Xin, in addition, notes that exports of non-pandemic related products were up 21 per cent in November, compared with 7 per cent on average in the third quarter, and that growth in pandemic-related product exports is not as high as it was earlier in the year. That implies that China’s continuously improving export performance has a broader base to it than the direct effects of the pandemic.

But temporary stimulus measures to support the economy — especially incomes that governments have provided to households — may have sustained demand even for products that are less obviously tied to the pandemic.

As such, those trying to forecast the future of China trade need to consider the western policies, as much as the products, that the pandemic has given rise to.

Charted waters

Demand for ultra-cold storage freezers has spiked as governments and manufacturers prepare to ship Covid-19 vaccines around the world and along the so-called last mile to those most vulnerable to the disease. Unique characteristics of the two leading Covid-19 vaccines mean they both have to be transported frozen.

Diagram explaining how an ultra-low temperature freezer for storing vaccines works and how it differs from a normal freezer

Policy watch

UK prime minister Boris Johnson in Downing Street on Tuesday before heading to Brussels for crucial trade talks
UK prime minister Boris Johnson in Downing Street on Tuesday before heading to Brussels for crucial trade talks © Andy Rain/EPA-EFE/Shutterstock

Boris Johnson is to travel to Brussels for make-or-break talks on a UK-EU trade deal, with negotiations deadlocked and warnings that there was “every chance” they may fail. The British prime minister will meet Ursula von der Leyen, European Commission president, “in the coming days” as nine months of talks on a post-Brexit relationship between the two sides come to a head.

Despite another day of intensive talks, Brexit negotiators failed on Monday to resolve persistent disagreements that have dogged future-relationship discussions since they began in March, with three big sticking points remaining.

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Emerging Markets

South Korea looks to fintech as household debt balloons to $1.6tn




South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed

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Emerging Markets

European and Chinese stocks rise after calming words from Beijing




Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

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Emerging Markets

Turkey battles to quell wildfires as residents and tourists flee




Turkey updates

Turkey has contained more than 100 wildfires after a series of blazes near its Mediterranean coastline killed six people and forced thousands of residents and foreign tourists to flee holiday resorts, the government said on Sunday.

Winds gusting at 50km per hour, low humidity and temperatures hovering near 40C have made controlling the fires difficult, Bekir Pakdemirli, the forestry minister, said on Twitter and in comments reported in state-run media.

The fires began on July 28, and the simultaneous start of so many conflagrations raised suspicions they may have been deliberately set, Pakdemirli said, although he did not offer evidence of arson.

About 100 Russian nationals were evacuated from the Bodrum peninsula in western Turkey on Saturday and moved to hotels elsewhere, the Russian consulate in the city of Antalya said in a statement, according Sputnik, a Russian state media outlet. Local tourists were also among the evacuees, with some forced to leave by sea as the blaze cut off other escape routes.

Flights from Russia, Turkey’s biggest source of tourists, only resumed in late June after Moscow suspended charter trips amid a record outbreak of Covid-19 cases in Turkey in the spring. Coronavirus-related travel restrictions to Turkey have hammered its tourism sector, which directly and indirectly accounts for about 13 per cent of gross domestic product.

Villagers water trees to stop the wildfires that continue to rage in the forests in Manavgat, Antalya, Turkey © AP

The forestry ministry website showed at least 15 active fires on Sunday. Villagers and forestry workers were among the six people who died, according to Turkish media. Mehmet Oktay, mayor of the resort town of Marmaris, said one volunteer firefighter had died and another 100 people had been injured in a spate of fires that have scorched more than 10,000 hectares near the town.

A half-dozen fires continued to sear areas mostly inaccessible by road, and the number of blazes across Turkey meant not enough firefighting planes were available, he said. “It’s heartbreaking, and I am fighting back tears to concentrate on the emergency at hand. It will take more than a decade to restore this land,” he said.

Thousands of farm animals and untold numbers of wild animals also perished in the fires, which one meteorologist estimated reached 200C.

Wildfires are an annual occurrence in south-west Turkey’s pine forests, and one expert told CNN Turk television that 95 per cent are deliberately or accidentally sparked by people.

Yet the scale of the current conflagration is remarkable, and some are blaming climate change for the disaster. Turkey recorded its highest ever temperature in a south-eastern town last month, and much of the country has been gripped by drought this year, while deadly floods struck north-east Turkey last month.

Several other Mediterranean countries are battling blazes this summer, including Cyprus, Greece, Lebanon and Italy, and scientists have said the extreme weather events across the globe this summer may be the result of global warming.

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