Two to tango

It’s been a year in which the debate on the likelihood of a ‘double dip’ recession has kept the commentators busy.

Two years ago, the talk was more about decoupling, and whether the emerging economies had deepened to a point that they were no longer so dependent on exports to developed markets, primarily the US.

For China, of course, there has been a recovery in exports to North America and Europe. But, two years on, it is worth asking if the anticipation of a fiercer slowdown may have encouraged a flowering of trade relations elsewhere, especially with emerging markets.

Certainly, Chinese domestic demand (up about 15% in year-on-year terms, if you take retail sales growth as an indicator) is more important to trade within the Asian region than before. Hence HSBC research in the autumn pointed out a new seasonality in regional exports. Shipments used to be especially strong in the third quarter in preparation for Christmas sales in the West and then tailed off. Now, they stay strong into year-end as exporters gear up for the Chinese Lunar New Year shopping spree.

Other signs of new trade ties? Agreements like the China-ASEAN free trade pact that came into effect at the start of the year (see WiC44), bringing together 1.9 billion consumers. Although tariffs are being reduced progressively across the 11 member countries, ASEAN officials have predicted a 50% boost to two-way trade in the pact’s first year.

There was evidence of a similarly robust mood in HSBC’s proprietary survey, the Trade Confidence Index. In the most recent update in September, Chinese respondents were more optimistic about growth prospects for intra-Asian commerce than with other regions. And a fifth of those asked in Southeast Asia expected to use the renminbi for trade settlement in the six months ahead, the highest proportion outside the Greater China region itself.

Our third Focus issue in October looked further afield, particularly at China’s links with the Middle East and Latin America, where the commodity story is a key theme. The spotlight was on new trade corridors linking, for example, the soya fields of inland Brazil with the bean crushing plants (and pig farms) of China’s northern Heilongjiang province, or the thousands of Middle Eastern traders now conducting business from the Yiwu export hub in Zhejiang. In fact, few weeks go by without mention in the Chinese press of a senior Beijing diplomat touching down in Riyadh, Luanda, Caracas or Sao Paulo. The trips are followed by announcements of commodity-related investments or loans intended to foster deeper trade ties. There was another one this week, with CNOOC spending $3.7 billion on BP’s stake in Pan American Energy’s oil and gas assets in Argentina.

Australia – not an emerging economy, admittedly – is also worth a mention. In 1999, China bought less than 5% of Australia’s exports. But by last year, it was accounting for one in five of its direct export dollars, most of them commodity related. That level of demand helped the ‘Lucky Country’ (see WiC83) become the strongest developed-world performer this year.

Decoupling achieved, then? For the global economy, it does look like softer demand in advanced economies is now better offset by faster growth in China, as well as its trade with some of the other larger emerging markets.

Of course, the analysis is complicated by China’s role in the global supply chain as a processor of imports that are then shipped off to the West.

But in a revealing piece of research in September in which the HSBC Economics and Strategy team looked anew at the decoupling issue, China was some way down the list in terms of its sensitivity to a percentage point change in US GDP growth. That’s helped by the size of its domestic market, as well as the fallback firepower of government spending in event of a wider slowdown.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.