China now matching US-EU as driver of Asian export growth

HONG KONG • China is now an equal or bigger driver of export growth in neighbouring economies as the United States and the European Union combined, marking a significant shift in the economic pecking order since the 2008 global financial crisis.

That is according to research by Deutsche Bank economists, who weighed up the influence of the US and China over the rest of Asia through the prism of export growth, as well as the currency and bond markets.

In Taiwan and Indonesia, for example, the growth of China's gross domestic product dominates that of the US and EU as a source of export demand.

In other economies, the trading giants are equally important.

"This is noticeably different from the pre-crisis years, when China was much less important - bordering on irrelevance - as an engine of growth in the region," Deutsche analysts led by Asia-Pacific chief economist Michael Spencer wrote in a note.

After a rocky start to the year, China has been aided in its growth prospects by a record surge in credit in the first quarter. Key indicators for May are expected to show that the economy is continuing to find its footing and growth is on track to hit the Communist Party's goal of 6.5 per cent to 7 per cent this year.

The International Monetary Fund in April upgraded its China growth forecasts by 0.2 percentage point for this year and next, following signs of "resilient domestic demand" and growth in services that offset weakness in manufacturing.

Beyond the pace of GDP growth, China's currency gyrations are also increasingly important across the region. While the US dollar still drives volatility in most Asian currencies, the yuan is as least as important for fluctuations in the Malaysian ringgit and Korean won and is growing in significance for other exchange rates, except the Philippine peso.

"Asia is far from being a 'yuan bloc', but idiosyncratic shocks to the yuan cannot be ignored," according to the Deutsche analysts.

The People's Bank of China (PBOC) surprised traders this week by setting the reference rate at weaker-than-expected levels, helping to send the currency to its biggest declines in four months versus a trade-weighted basket that includes the yen and the euro.

The rate's fixing had become more predictable since early February, after the PBOC pledged greater transparency and the yuan increasingly tracked moves in the dollar against major currencies. That was after a sudden weakening of the yuan in January fuelled fears of a devaluation and triggered global market turmoil. Over the subsequent three months, the central bank adopted a more market-based system to set the rate.

Where the US still dominates, however, is in the bond markets: Moves in Treasury yields continue to steer Asian bond trading. And even if Asian central banks do not match rate tightening by the US Federal Reserve, financial conditions in the region may tighten if US yields increase.


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A version of this article appeared in the print edition of The Straits Times on June 11, 2016, with the headline China now matching US-EU as driver of Asian export growth. Subscribe