What the Korean Won Can Tell Us About Chinese Growth
Marketplace analysis of attempting to determine Chinese macroeconomic stability and growth is insatiable. Because of this, I am continuously interested in finding proxies for the Chinese economy since low- to medium-frequency data out of China (GDP or manufacturing figures) are notoriously inaccurate.
With South Korean GDP figures out this week unexpectedly low and the Korean won depreciating significantly against the dollar, to what extent can we use the Korean economy as a proxy for Chinese domestic industrial or consumptionary activity?
According to correlation coefficients, the answer is yes. Strength in the US dollar against the Korean won is highly correlated with the Australian dollar, a proxy for Chinese raw material consumption, the EEM emerging market index, a less speculative proxy of Chinese equities than the traditional Chinese indices, and also a Chinese consumption ETF. Although the latter follows a bit of a speculative bent, it still can provide interesting insight.
Overall, trade with China accounts for 26 percent of all South Korean exports. Chinese GDP figures are based on political promotions, but currency and equity markets are not. Price action in the Korean won against the dollar and South Korean GDP figures do not lie. The economy is hurting because less won is in demand from less Chinese consumption. This could be a canary in the coal mine or it could be a blip on the map as had been last 1Q19 US GDP growth which saw a rebound up beyond 3 percent in 2Q19 as just reported today.
But all good things must come to an end. Chinese growth was always unsustainable at such high levels and still is. Markets require corrections. The question remains can Chinese domestic stimulus continue to soften the landing which is required for it to reverse from unsustainable levels of extraordinarily high provincial and national debt to GDP. To be determined. For now though, let’s just keep on looking at the more transparent economies that are highly tied to China for more accurate insights into the Middle Kingdom’s economy.
With South Korean GDP figures out this week unexpectedly low and the Korean won depreciating significantly against the dollar, to what extent can we use the Korean economy as a proxy for Chinese domestic industrial or consumptionary activity?
According to correlation coefficients, the answer is yes. Strength in the US dollar against the Korean won is highly correlated with the Australian dollar, a proxy for Chinese raw material consumption, the EEM emerging market index, a less speculative proxy of Chinese equities than the traditional Chinese indices, and also a Chinese consumption ETF. Although the latter follows a bit of a speculative bent, it still can provide interesting insight.
Overall, trade with China accounts for 26 percent of all South Korean exports. Chinese GDP figures are based on political promotions, but currency and equity markets are not. Price action in the Korean won against the dollar and South Korean GDP figures do not lie. The economy is hurting because less won is in demand from less Chinese consumption. This could be a canary in the coal mine or it could be a blip on the map as had been last 1Q19 US GDP growth which saw a rebound up beyond 3 percent in 2Q19 as just reported today.
But all good things must come to an end. Chinese growth was always unsustainable at such high levels and still is. Markets require corrections. The question remains can Chinese domestic stimulus continue to soften the landing which is required for it to reverse from unsustainable levels of extraordinarily high provincial and national debt to GDP. To be determined. For now though, let’s just keep on looking at the more transparent economies that are highly tied to China for more accurate insights into the Middle Kingdom’s economy.