[Who,Will,Benefit,from,China’s,Stimulus?] I’mfromChina

　　 　　Asian exporters are losing another important growth driver, China, as a result of the slowdown in investment in China. Talk of another possible round of fiscal stimulus from Beijing is bringing hope. A number of recent official comments have indicated that government policy will be fine-tuned to support growth. However, we argue that the new fiscal package is likely to be smaller in scale than the previous CNY 4trn stimulus of 2009, and more aligned with China’s 12th Five Year Plan.
　　To gauge the impact of potential new stimulus on Asian economies, we look at the experience of China’s 2008-09 fiscal stimulus package. The package was announced in November 2008, and China’s investment and production activity started to respond in early 2009. Subsequently, Asia’s exports to China mainland(with the exception of India’s) grew strongly; this was especially true for Thailand, Indonesia and Taiwan. Relative to the relative sizes of their economies, Hong Kong, Taiwan and Thailand received the biggest lift from China mainland’s fiscal boost.
　　On the FX front, isolating the impact of China’s 2009 stimulus from other influences – especially quantitative easing by the US Federal Reserve – is difficult. However, the announcement of the CNY 4trn package itself did not stop the drop in the ADXY (the measure of Asia ex-Japan currencies against the US dollar). The FX markets responded to the hard evidence of China’s faster economic growth rather than the announcement of the stimulus package. We expect the Indonesian rupiah (IDR), Korean won (KRW) and Singapore dollar (SGD) to outperform on another round of fiscal stimulus. This partly reflects the direct impact of increased demand from China, but also the fact that these currencies would benefit more from a general improvement in sentiment and risk appetite.
　　 Is a turnaround in China’s demand on the cards?
　　
　　
　　
　　 Asia’s exports to China have slowed along with China’s growth
　　2012 has not started well for Asian exporters selling to China. Chart 1 shows y/y growth in Asian economies’ exports to China in 2011 (vertical axis) and in the first four months of 2012 (horizontal axis). Those above the blue diagonal line have seen slower growth in 2012 than last year; they include all key Asian economies except Vietnam and the Philippines. For six economies – Thailand, Taiwan, Malaysia, Singapore, India and Japan – exports to China have swung from growth last year to a contraction this year: Hong Kong’s and Korea’s exports to China are barely growing.
　　We believe this reflects the slowdown in China’s economy, especially in investment, in recent months. While China’s role in processing trade is important, its exports to the US and the euro area grew 4.6% y/ y in the first four months of 2012, while its imports from Asia grew only 1.6% y/y. Hence, we do not think weakness in the West fully explains China’s declining appetite for Asian exports. The less favorable commodity price effect, which has turned from a massive positive windfall to a more neutral position, means that commodity exporters such as Malaysia and Indonesia are seeing much slower growth in export values.
　　Against this backdrop, growing indications that China will step up fiscal stimulus is good news. Below, we revisit the export performance of individual Asian economies in 2009 to determine which economies stand to benefit the most from China’s potential new stimulus measures.
　　 Indonesia, Taiwan, Vietnam and Japan saw the biggest gains in 2009
　　Following the announcement of the CNY 4trn fiscal stimulus package in November 2008, China’s investment cycle bottomed out at the end of 2008 and gained momentum in H1-2009. Chart 2 shows q/q growth in China’s imports (seasonally adjusted) from individual Asian economies in Q2- and Q3-2009. Thailand and Indonesia saw large q/q jumps in their exports to China in Q2, of 36% and 32.4%, respectively. The breakdown by product type shows that mineral fuels (including coal) and palm oil were responsible for Indonesia’s strong growth, which continued into Q3-2009.
　　Taiwan’s exports to China mainland also grew more than 20% q/q in Q2-2009, driven by capital goods such as machinery and electrical equipment, as well as consumer electronics. For the rest of the region, double-digit export growth to China mainland was common in Q2-2009; Hong Kong and Singapore held onto this momentum in Q3-2009 thanks to their status as trading hubs. India is one exception here, but China’s economic boom matters less directly to India given limited trade between the two countries and India’s relatively low exposure to trade.
　　Charts 3 and 4 illustrate China’s trade relationships with individual Asian economies. Chart 3 shows each economy’s exports to China as a share of its total exports in 2007 versus 2011. In North East Asia, China mainland is important to Taiwan, Hong Kong and Korea, absorbing 25- 50% of their exports. It is worth noting that China’s importance to Malaysia and the Philippines has increased significantly since the financial crisis – 21% of the Philippines’ total exports went to China in 2011, up from 11.4% in 2007, while the share for Malaysia rose to 20% from 8%. This reflects greater diversification by East Asian economies and China’s growing importance as both a final consumer of Asian exports and a global manufacturing hub.
　　Chart 4 shows each economy’s exports to China as a share of its GDP. Not surprisingly, this ratio is by far the highest for Hong Kong, whose exports to China are equivalent to 90% of its GDP. Hong Kong is followed by Taiwan, Malaysia, and Singapore, which are among the world’s most open economies.
　　We then combine each economy’s experience in Q2-2009 with its current exposure to derive a relative scale of which economies stand to benefit the most from China’s fresh round of stimulus (Chart 5). Hong Kong, given its exceptionally high exposure to China, comes out on top, followed by Taiwan and Thailand. India and Japan are likely to see much less impact on their economies from China’s reflation.
　　There are some caveats to this analysis:
　　1. The scale of the upcoming stimulus is unknown – and, as we learned in 2008-10, the number announced by the government is unlikely to be representative of the true scale of the stimulus.
　　2. The new stimulus package might entail different types of investment that require different imported products. China’s rising labour costs could spur demand for more capitalintensive machinery, which would benefit Japan, Korea and Taiwan.
　　3. China’s import growth will always reflect processing flows (in addition to imports to meet China’s own demand), and will therefore be a function of the global economic environment and not only China’s fiscal policy. Nonetheless, we think our ranking helps to establish which economies are likely to benefit the most from the upcoming stimulus.
　　4. China’s policies may have indirect effects, such as supporting commodity prices, which will in turn boost total demand for commodities from countries such as Indonesia and Malaysia.
　　
　　
　　
　　 Gauging the FX reaction to the fiscal stimulus
　　The announcement of China’s CNY 4trn stimulus package came on 10th November 2008. In the wake of this policy step, alongside monetary and fiscal measures elsewhere, China’s macroeconomic readings steadily improved over the course of the following year. Industrial output growth was on a rather irregular path in H1-2009(on a y/y basis), but then accelerated more decisively in H2-2009, peaking at 19.2% in November.
　　The announcement itself did little to help Asia exJapan (AXJ) currencies in the very short term, with the ADXY (the measure of AXJ valuations versus the US dollar) slipping 3.3% in the 10 days following the announcement. The decision by the US Fed to embark on the first round of quantitative easing, announced on 25 November, proved more decisive for the risk environment and AXJ currencies. The rebound in the ADXY in late November and December 2008 left the index 1.3% above its level immediately ahead of China’s fiscal stimulus news.
　　AXJ currencies remained under downward pressure in early 2009, despite China’s stimulus and the Fed’s‘QE1’. Indeed, the new ADXY slide was uninterrupted by Congressional approval of a major US stimulus measure (The Recovery Act) in mid-February. At its earlyMarch 2009 low, the ADXY had slipped a net 4.1% since China’s fiscal stimulus news. Given the high degree of broader global macroeconomic volatility, this relationship may be partly a simple coincidence, but the ADXY low came just before the release of the first substantial y/y gain in China’s industrial production in 2009 (an 11.0% gain in February, released in early March).
　　The steady climb in China’s industrial production readings over the remainder of 2009 may have played a role in driving a powerful ADXY rally, which left it a net 4.4% higher by end-2009 (versus 10 November 2008). The FX market responded to the hard evidence of faster economic growth rather than to the announcement of stimulus steps.
　　In order to pick out the relative outperformers following China’s previous stimulus, we look at the percentage change in the monthly effective exchange indices published by the Bank for International Settlements from November 2008 to April 2009 (a six-month period) and from November 2008 to October 2009 (a 12-month span). The KRW performed relatively well, adding 13.8% in the first six months and retaining most of those gains over a one-year horizon. The PHP also performed well in the first six months, but these gains subsequently faded. The IDR posted a healthy 12.9% gain over the full year. This analysis is a clear warning against treating fiscal stimulus news in isolation as a strongly positive signal for risk appetite in FX. In the year to October 2009, the Japanese yen (JPY) climbed 16.0% in trade-weighted terms.
　　A drop in a currency’s effective exchange rate can sometimes reflect rallies in the currencies of other major trading partners rather than an outright drop in the currency’s value versus the USD. Gauging AXJ currency performance versus the USD allows us to measure something that is directly tradable. Moreover, it allows us to be more specific in terms of timing. We used October 2008 as the base month in the trade-weighted analysis, as the fiscal stimulus announcement came in early to midNovember; using November 2008 as the base month would have risked penalising currencies that rallied on the announcement of the stimulus itself.
　　Daily data on bilateral currency performance against the USD allows us to focus precisely on changes in currency valuations from the days ahead of the stimulus news from Beijing. On this basis, the IDR and the KRW led the advances against the USD over the subsequent year (15.0% and 12.3%, respectively); the SGD also posted a healthy gain (6.5%). The new approach also allows us to expand our analysis to include the Vietnamese dong (VND), for which the BIS does not publish trade-weighted trade indices; purely on the basis of headline returns, the VND does not disturb the leaderboard (-5.7% against the USD over the year).