Chart of the Week: Trade war’s impact on foreign and Chinese firms


Trump’s decision of imposing 10% tariffs on the remaining USD 300bn Chinese exports will put more pressures on the China-based foreign firms, obliging them to diversify the supply chains.
Ma Tie Ying05 Aug 2019
Photo credit: AFP Photo


Chart of the Week: Trade war’s impact on foreign and Chinese firms

Exports by the foreign funded enterprises in China, which account for nearly 40% of China’s total exports, fell by 5.8% YoY in Jun19, down from +6.9% in Jun18 before the first round US tariffs took effect. This outpaced the decline in exports by Chinese private enterprises during the same period (6.0% in Jun19 vs 13.8% in Jun18). 15 out of China’s top 20 exporters are foreign firms in the electronics sector, including 10 from Taiwan, 4 from the US and 1 from South Korea, according to a 2018 report by China Customs. Trump’s decision of imposing 10% tariffs on the remaining USD 300bn Chinese exports, which are largely comprised of electronics products, will put more pressures on the China-based foreign firms, eroding their profits and obliging them to diversify the supply chains.



China: The continued moderation in global manufacturing activities suggests that China’s trade will likely start 2H on a soft footing. We expect exports and imports to fall 1% and 3% YoY respectively in July. Early indicators point to weakness – new export orders of Caixin manufacturing PMI stayed in contractionary territory in July. On inflation, the year-on-year increase in CPI is seen moderating to 2.5% in July from 2.7% in June due to a retreat in agricultural product prices. PPI is expected to fall into negative territory owing to a high base and contracting exports.

India: The RBI-led monetary policy panel meets this week, where we look for a 25bp rate cut, taking the benchmark repo rate to 5.50%. Recent comments by Governor Das that policy stance will depend on incoming data, nudged markets to pare easing expectations. Additional remarks that the change in stance to ‘accommodative’ in June was itself akin to a cut (implying ~100bp cut YTD), suggested that the panel/RBI might prefer to focus on transmission next. The central bank’s preference to be data-dependent is not surprising, especially as the RBI has been more proactive than regional peers this year. Nonetheless, with a sub-target inflation on hand and soft numbers (auto, cement sales, production, PMIs, construction sector) underscoring weak economic activity, monetary policy will have to continue with the heavy lifting in rest of the year. Separately, June industrial production is expected to print a weak number, taking cue from core industries index and PMIs.

Japan: The 2Q GDP report (preliminary) is the focus this week. Headline growth is expected to decelerate to 0.6% QoQ saar from 2.2% in 1Q, but still in line with the long-term trend. Exports contracted further in 2Q, in the context of the deterioration in global demand and the escalation in China-US trade war. But domestic demand (private consumption in particular) maintained steady expansion last quarter, helped by the tight labour market conditions. We maintain the full-year 2019 GDP growth forecast at 0.7%, but see bigger challenges in 2H, taking into account the upcoming consumption tax hike and the rise in Japan-Korea trade tensions.

Malaysia: Industrial production is expected to see some degree of moderation in June. The headline number is likely to ease to 3.4% YoY, down from 4.1% previously. Latest trade figure which saw export sales shrank by 3.1% probably suggests that there could be downside risk to this forecast. Indeed, PMIs of all key markets are mostly in the negative territory or trending downwards. Global semiconductor shipment and billing growth have all continued to decline. External demand is already weak and trade war has further exacerbated the doldrum. While there could be some trade diversion from the trade war, the effect has been weak, with Indochina economies such as Vietnam showing more pronounced benefits. In contrast, the lift for Malaysia appears to be marginal. Overall outlook for the manufacturing sector remains challenging.

Philippines: As inflation has soften further to 3.3% YoY in Jun19 from 4.4% in Jan19, resulting an average of 3.7% this year, BSP has more room to continue its monetary easing. We expect BSP to cut policy rate by another 25bps at this week’s policy meeting. GDP Growth is expected to pick up to 6.0% from 5.6% last quarter, as the 2019 budget was signed early Apr19 and trade balance has somewhat improved as imports slowed. Weak exports could continuously weigh on growth this year as global growth and electronic manufacturing demand weaken further. We expect trade balance to improve slightly to -PHP 3.0bn in Jun19 from -PHP 3.28bn in the previous month.

Taiwan: July trade and inflation data are due this week. Export growth is expected to rise mildly by 0.7% YoY (vs 0.5% in June), while CPI inflation is expected to stay benign at 0.6% (vs 0.9%). Shipments to the US have picked up in recent months to take the overall export growth into positive territory, reflecting the trade diversion effect of US-China trade war. But it would prove overoptimistic to expect export figures to sustain the uptrend in 2H, given the general slowdown in global growth and the lingering weakness in the tech sector. Inflation pressures have remained muted so far this year, in light of the tepid consumption growth, softness in global commodity prices, and relatively stable local weather conditions (compared to last year’s typhoon season). Barring unexpected supply-side disruptions, CPI figures are likely to stay in the 0.5-1% range in the rest of this year.

Thailand: The Bank of Thailand has signaled its discomfort with a strong baht weighing on the growth/trade outlook. There is, however, little it can do, in a challenging global landscape, to control the safe-haven flows into attractive low-but-stable yielding Thai assets. The BOT could consider a rate cut to help reduce the baht’s yield appeal, but it will be no panacea. A measured 25bp cut would simply undo last December’s hike. But financial stability will become a concern if lower rates further lift household debt. Hence, we expect the BOT to keep monitoring THB strength and not rush into policy easing. Odds of easing will rise if data continues to stay weak and THB appreciates past 30.50/USD and edges to 30.0 (six-year lows).


To read the full report, click here to Download the PDF.

Ma Tieying

Economist - Japan, South Korea, & Taiwan
matieying@dbs.com
 
 

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.