10 July 2018
Taiwan: Trade war impact begins to come through

Headline export growth came in at 9.4% on the back of negative growth in electronic exports, which we see as an alarming signal. This could be the first hint of a slow down in Taiwan and the sales of smart devices

Alarming signals from negative electronic exports growth

Taiwan's headline export growth slowed down to 9.4% year on year from 14.2%YoY, on the back off negative growth in electronic exports. In contrast, higher energy and metal prices pushed up import growth to 15.4%YoY from 12.0%YoY.

We see alarming signals from the negative annual growth of electronic parts exports (-1.7%YoY), and integrated circuits (-3.0%YoY). Electronic parts exports, which are important to Taiwan made up 30.9% of total exports in June.

Combining the data of export destination, we believe that the export growth of electronic parts to the US and China have slowed which could be a harbinger of the upcoming slowdown to the sales of new smart devices. 

These numbers don't fully account for the ongoing trade spat .. yet

We have to realise that trade data in 1H18 has yet to reflect the full impact of the trade war between Mainland China and the US. We've only seen metal prices going up, which could be a result of the US tariffs on aluminium and steel and therefore, this data would only affect second quarter's  GDP slightly. 

For now, we maintain our forecast of Taiwan GDP at 3.1%YoY in 2Q18

Trade war impact on Taiwan - for better or worse?

How the trade tariff war impacts China, and the US affect Taiwan is an interesting topic. 

Taiwan is an exporter of electronic parts and machinery and also has an agriculture sector. Taiwan's electronic goods could benefit from the trade war as a substitution for Chinese electronic products subject to a 25% tariff from the US. Taiwan could also export its agriculture produce to China as a substitution for US agricultural products that face a 25% duty from China.

But we'd like to highlight that not every company faces a positive prospect. Given that supply chain in the electronics sector is closely linked, tariffs on Chinese electronic products could also negatively affect Taiwan if it is a supplier to a Chinese firm that loses its export orders because of the 25% tariff. 

As expected, the impact on the labour market lags export activities, but we believe that the low unemployment rate (3.63%), could edge up gradually as the trade war escalates.

Only time will tell if Taiwan benefits from the trade war as a substitute exporter or get hurts as its supply chain is hammered, but if things continue to escalate - one thing is sure - as the global economy is affected, global demand would fall and so would Taiwan's economic growth. 

India: Why we’re now looking for two rate hikes this year

We expect the India central bank (RBI) to hike rates at the August meeting and again in October, taking the policy rate to 6.75%. We see USD/INR trading toward 71.5 by end-2018

A slew of Indian economic releases over this week and next will set the expectation-agenda for the Reserve Bank of India's policy for the rest of the year. While we continue to expect the RBI to raise the policy interest rates by 25bp at the next meeting on 1 August, we have added one more hike at the October meeting to our policy forecast. We're looking to a USD/INR exchange rate at 71.5 by end-2018 (spot 68.7).

Rising foreign reserves gives room for a weaker yuan

Foreign exchange reserves in China rose $1.51 billion in June from May, stopping the falling trend. A-share's inclusion in the MSCI from 1 June helped, and wider inflow channels give more room for yuan weakening

No depletion of foreign exchange reserves

Inflows have more than offset outflows in June. 

On 1 June 2018, A-shares inclusion in the MSCI brought $22 billion capital inflows into China. We also expect a trade surplus of near $25 billion in June.

But as the dollar index rose by 0.5%, the valuation effect on non-USD dollar assets in China's foreign exchange reserves was negative. This was the main reason for the drop in foreign reserves in April and May.

Yuan depreciation of more than 3% in the month should have resulted in some capital outflows.

Yuan can weaken further as persistent net outflows is no longer a concern

In the future, we expect inflow channels to continue to widen further. This is the main reason that we have revised our yuan forecast to 7.0.

Inflows include investments in financial assets onshore (more A-share inclusion in the MSCI on 3 September 2018), and the opening up of business markets for foreign investors interested in financial sectors and transport manufacturing (the opening up of different sectors has a different timeframe from now to 2020).

If foreign exchange reserves fall only slowly or even rise due to inflows when the yuan weakens, then the concern about net capital outflows that would deplete fx reserves shouldn't be a concern. 

We believe that a weaker yuan in the middle of a trade war between China and US is reasonable because a currency would depreciate to adjust for slower export growth. It would be strange if the yuan appreciates against the dollar when the trade war continues.

We, therefore, confirm our yuan forecast at 7.0 by the end of 2018.

Trade war's impact on asset market

The trade war started officially at the beginning of July, and we expect another $16 billion of goods will be subject to a 25% tariff from the US and then from China as soon as before August.

All of this should have been priced in in asset markets. 

But the extra $200 billion worth of goods subject to a 10% tariff from the US after China retaliates is still to be fully priced in. When the $200 billion tariff becomes more imminent then the market should be more volatile than the current environment.

Reading time around 5 minutes

Good MornING Asia - 10 July 2018

The inclusion of A-shares in the MSCI from June prevented a fall in China's foreign exchange reserves in the last month. Taiwan's data showed signs of the trade war impact starting to come through

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