Daily BriefsMacro

Macro: China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite and more

In today’s briefing:

  • China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite
  • US: Trump’s Record Card on Trade Mixed; China Trade Already Challenging Biden
  • Taiwan: All Cylinders Firing in Unison
  • Rates 10y Dashboard: EM Long-End Rates Relink with US Rates
  • UK: Corporate Debt Growing Pains
  • FX Dashboard: EM FX Volatility Rises from the Lows

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

By Prasenjit K. Basu

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China’s economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   

While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). 

Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY — thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world’s economies gradually reopen, reducing demand for China’s exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China’s economy. 


US: Trump’s Record Card on Trade Mixed; China Trade Already Challenging Biden

By Prasenjit K. Basu

Trade data for February 2021 (due next week), the first for the Biden era, will be scrutinized for bilateral deficits. In 2020, the US’ bilateral deficits with only 3 of its top-10 trade partners declined — Canada, Japan and Germany — suggesting that Trump tariffs on steel and aluminium had worked partially. The US deficit with China declined sharply in 2019 and in Jan-Oct 2020, but mysteriously widened in the next 3 months. The US suspects that big deficits with Vietnam, Taiwan, South Korea and Malaysia reflect transshipment of mainland-China products via those countries, and they are consequently already coming under some pressure. The trade war may not heat up further under Biden, but it will not cool down anytime soon. 

The US had a trade deficit of US$916 billion in 2020, 6% larger than in 2019, with exports down 14.1% YoY and imports down 6.6% YoY. But with net tourist and student inflows to the US down sharply, the current account deficit widened by as much as 35% to US$647 billion or 3.1% of GDP in 2020 (the largest in a decade, but much lower than the 2006 peak of 6% of GDP). US bilateral trade deficits with Canada, Japan and Germany (which are among top-5 trade partners) declined in 2020, suggesting that the impact of the steel and aluminium tariffs imposed early in the Trump term were beginning to finally pay off at least partly. 

Importantly, for the second consecutive year, the bilateral trade deficit with China declined (by a modest 3.6% YoY) to US$311 billion, the lowest since 2011. That bilateral deficit had widened in 2017 and 2018 (while Trump was only threatening but not actually imposing any tariffs). The imposition of tariffs on China’s imports in 2019 (extended in 2020 to nearly half of goods imports from China) did contribute to reducing the US bilateral trade deficit with China. However, US imports from China increased 23.8% YoY in November-December 2020 (immediately after the US election), having declined in 9 of the first 10 months of 2020, and rose 17.5% YoY in Jan 2021.  

The beneficiaries of export diversion from China were Vietnam, Switzerland, Taiwan, South Korea and Malaysia, who saw US imports from them rise significantly in 2020 — thereby also widening the US’ bilateral trade deficits with them in 2020. The US believes that at least some of these countries’ widening trade surpluses with the US reflect Chinese exports being transshipped to the US via those countries. So the Biden administration is likely to pay increased attention not only to the bilateral trade deficit with China (which has mysteriously risen sharply again since the election), but also bilateral deficits with Vietnam, Taiwan, Malaysia, South Korea, etc., which may reflect the impact of transshipment of mainland-Chinese products into the US. 


Taiwan: All Cylinders Firing in Unison

By Nigel Chiang

We expect a blow-out 1Q21 GDP growth print in the ballpark of 7% in year-on-year terms as manufacturing continues to surge off the back of buoyant external demand, likely catalysing a broader-based economic acceleration, as evinced by the recent momentum in capex and private consumption.

The robust economic backdrop poses upside risks to our latest full-year GDP growth forecast of +4.6 for 2021, but also implies continued upward pressure on the currency, which the monetary authorities have thus far offset via off-balance sheet purchases of US Dollar denominated assets, including via Taiwan’s life insurers (lifers). This strategy has worked in the past but could come under the US’ ire soon under a new and more energised Biden administration.


Rates 10y Dashboard: EM Long-End Rates Relink with US Rates

By Gautam Jain, PhD, CFA

In this note, we show that the beta of EM rates to US rates has picked up in recent days as EM rates have gone from outperforming to underperforming as US rates sell-off.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


UK: Corporate Debt Growing Pains

By Phil Rush

  • Despite the deepest economic downturn in three centuries, the total number of company insolvencies has fallen to its lowest annual level since 1989.
  • Support like furlough has kept the wolf from the door, but many companies now lack the balance sheet capacity to thrive, having levered up just to survive.

FX Dashboard: EM FX Volatility Rises from the Lows

By Gautam Jain, PhD, CFA

In this note, we discuss the rise in the volatility of EM currencies as the dollar’s volatility picks up and what to expect ahead.

The attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


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