Trade war impact deepens across Asia, but ‘real economic shock’ yet to hit

China’s economy grew at its slowest pace in nine years in the third quarter as trade frictions with the US had an effect. Above, welders at a truck manufacturer in Weihai. (AFP)
Updated 01 November 2018
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Trade war impact deepens across Asia, but ‘real economic shock’ yet to hit

  • Factory activity and export orders weakened across Asia last month
  • Prospects for higher US rates could feed back more market pain for region’s externally vulnerable economies

HONG KONG: The economic impact of the intensifying trade war between Washington and Beijing appeared to deepen last month with factory activity and export orders weakening across Asia, but analysts warned the worst was yet to come.

In a sign conditions for exporters and factories were deteriorating, manufacturing surveys showed marginal growth in China, a slowdown in South Korea and Indonesia and a contraction in activity in Malaysia and Taiwan.

Those figures follow weaker-than-expected industrial production data from Japan and South Korea on Wednesday, with output in the latter shrinking the most in over 1-1/2 years.

By contrast, the US ISM manufacturing survey for October is expected to show a much faster growth pace than in Asia, albeit a tad slower than in September, supporting the outlook for further Federal Reserve rate hikes.

Worryingly, the prospects for higher US rates could feed back more market pain for the region’s externally vulnerable economies — Indonesia, India and the Philippines, which have already been forced to raise rates to mitigate a sell-off in currencies, stocks and bonds.

“You have a tightening of monetary conditions around the world, a slowdown in Chinese demand, and financial market turmoil that affects sentiment and investment decisions,” said Aidan Yao, senior Asia EM economist at AXA Investment Managers.

 

Yao said many orders from abroad are still frontloaded in anticipation of yet more tariffs and the impact is still mostly indirect, through the business confidence channel.

“The real economic shock is yet to come,” he said.

China’s manufacturing sector barely grew last month after stalling in September and export orders contracted further, according to a private sector manufacturing report. An official survey showed the manufacturing sector expanding at its weakest pace in over two years, hurt by slowing demand both externally and domestically.

Japan showed more resilience, with activity picking up, though at a slower rate than in a previous flash estimate. The world’s third-largest economy faces pressures in other areas with its central bank trimming the inflation outlook, flagging external risks.

Its tech-specialist neighbor and Southeast Asian economies look more exposed, however.

A DBS analysis of Asian supply chains for products bound for the United States shows the biggest exposures in machinery and electrical equipment in South Korea, Singapore, Malaysia, the Philippines and Taiwan.

South Korea’s minerals and petrochemicals exports were also exposed, as well as Indonesia’s transportation industry, according to the DBS report, which looked at the correlation between China’s imports from Asia and its US exports.

The Harpex index, which tracks weekly container shipping rate changes and is a measure of global shipping activity, is now down 25 percent since its June peak.

The pressure on China’s economy is not just external. Economic growth cooled to its weakest quarterly pace since the global financial crisis at 6.5 percent, exhibiting lacklustre domestic demand by Chinese standards.

Things can get worse.

Washington has already imposed tariffs on $250 billion worth of Chinese goods, and China has retaliated with duties on $110 billion worth of US goods in a row sparked by US President Donald Trump’s demands for sweeping changes to China’s intellectual property, industrial subsidies and trade policies.

But absent any deal between Trump and Chinese leader Xi Jinping, who are expected to attend a G20 summit this month in Buenos Aires, the recently introduced 10 percent tariffs on $200 billion of Chinese goods will be raised to 25 percent and other tariffs may be placed on the remaining $250 billion-or-so of Chinese products which escaped the initial rounds.

“As everyone anticipates a further tariff hike...there is still a lot of front-loading going on. After Jan. 1, we expect many trade and economic activities to tumble,” said Kevin Lai, senior economist at Daiwa Capital Markets.

That all bodes ill for Asian financial markets, with many of the region’s currencies and bourses deep in the red this year. Those economies with high current account deficits have been particularly vulnerable to capital flight.

The rate hikes that central banks deployed to stop rapid declines in their currencies might also further slow activity.

“I would argue it to be wise to remain wary of EM currencies into those trade discussions a few weeks hence, and lean toward the US dollar instead,” said Michael Every, senior APAC strategist at Rabobank.

Manufacturers in India, which rely more on domestic demand, defied expectations for a slower expansion in activity in October and grew at the fastest pace in four months.

Vietnam was another standout economy in the region, showing an acceleration in manufacturing activity in October. The country’s labor base is still cheap by regional standards while its trade ties with the United States remain clear of the kind of disputes with which its larger Asian peers are wrestling.

As such, it’s seen as potential winner from the Sino-US trade war as companies consider rebasing and re-routing their supply chains away from the crossfire between the world’s two largest economies.

“Vietnam, by our estimation is the least impacted country in Asia...because if global companies have to move, Vietnam is a viable option,” AXA’s Yao said.

“But it will take a long time for Vietnam to take up some of the market share that China leaves behind.”

FASTFACTS

Washington has imposed tariffs on $250 billion worth of Chinese goods, and China has retaliated with duties on $110 billion worth of US goods.


Philippines’ richest man Henry Sy dead at 94

Updated 19 January 2019
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Philippines’ richest man Henry Sy dead at 94

  • Henry Sy had a net worth of $19 billion as of Friday, according to Forbes.com
  • Sy helped create mall culture in the Philippines

MANILA: The Philippines’ wealthiest man Henry Sy, who rose from being a penniless Chinese immigrant to leading a multi-billion dollar business empire, died on Saturday, his conglomerate has announced.
The 94-year-old, from the Chinese city of Xiamen, made his fortune with a Philippine shopping center conglomerate that has put up some of the largest malls in the world.
However his holdings also included banks, hotels and real estate in the Philippines, as well as shopping centers in China.
He had a net worth of $19 billion as of Friday, according to Forbes.com.
Forbes said he was the 52nd richest person in the world last year, beating out bold name tycoons like Elon Musk, Rupert Murdoch and George Soros.
“Henry Sy ... passed away peacefully in his sleep early Saturday morning. There are no further details at the moment,” his SM group said in a statement.
Sy put up his first shoe store in downtown Manila in 1956, a business which later grew into a diversified empire.
He stepped down as chairman of his holding firm in 2017, assuming the title of “chairman emeritus” and leaving trusted allies as well as his children in charge of his empire.
It was a long journey for a man who came to the Philippines as a boy to work in his immigrant father’s variety store.
“Our store was so small it had no back or second floor, we just slept on the counter late at night after the store was closed,” he told the Philippine Star newspaper in 2006.
After their shop was destroyed during World War II, Sy’s father returned to China but Henry chose to stay in the Philippines.
He got a commerce degree from a Manila university and started selling shoes in a shop which would later grow into a chain named “ShoeMart.”
By 1972, his shops had branched out into selling all manner of goods, prompting the name to be changed to SM Department Store.
But it was in 1985 that Sy made history when he opened his first “Supermall” in Manila.
Spanning over 424,000 square meters (4.6 million square feet), the mall included dozens of stores, numerous cinemas, restaurants, banks and other attractions that made it a one-stop shop for millions of Filipinos.
This was just the start, as more of Sy’s mammoth malls popped up across the country, some even containing ice skating rinks, a rarity in the tropical country.
Sy helped create mall culture in the Philippines, where steamy temperatures and the regular threat of torrential downpours can make outdoor shopping uncomfortable.
Sy’s holding company, SM Investments Corp. opened its first mall in China in 2001 and has been expanding there as well.
By 2018, SM said it had 70 malls in the Philippines and seven in China as well as six hotels and eight office buildings.
Sy’s empire has earned its share of criticism from labor groups, who say it uses thousands of contractual hires to avoid paying higher wages and benefits that permanent workers are entitled to.
SM officials have insisted that they do not engage in so-called “contractualization,” but say they hire “seasonal” workers for peak periods like Christmas, back-to-school and even weekends.