Time for Asian Train Wreck shorts: Korea iShares, what's this thing doing "what me worry" levitated?
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Steve Roach on Asian situation:
Korea could be the "canary in the coal mine" — an early warning sign of what lies ahead for an increasingly vulnerable Asian economy and an increasingly unbalanced global economy. The recent Korean data flow simply looks terrible. External demand support is rolling over: Export comparisons (Y-o-Y) have decelerated by 13 percentage points in two months — from 36% in July to 23% in September. At the same time, domestic demand has weakened appreciably: Wholesale and retail sales, combined, were down 1.5% in August, and capital spending declined sequentially in August; moreover, a broad gauge of Korean service-industry production was down -1.7% in August (Y-o-Y). With demand conditions deteriorating, inventories are piling up (+3.5% Y-o-Y in August) — leading to cutbacks in industrial production (-0.6% sequentially in August) and declining employment (down 1.6% sequentially in August following a 0.3% drop in July). All this smacks of a Korean economy that is now on the brink of outright cyclical contraction. — underscoring significant downside risks to our 3.8% GDP growth forecast for 2005. For the Korean stock market, which is now up 22% from its early-August lows, this could come as a rude awakening.
Why dwell on Korea? For starters, Korea is Asia's third-largest economy behind Japan and China. It has long been one of Asia's most dynamic Tigers. Over the 1986 to 1995 interval, the Korean economy grew at an 8.5% average annual rate — more than three times average gains of 2.5% for the world's "advanced economies." While Korean growth slowed significantly to 4.6% over the 1996 to 2003 interval, even that relatively subdued pace was nearly double the 2.7% average growth rate of advanced economies over that period. Yet Korea now personifies all that's wrong with the Asian growth model. For starters, it suffers from an increasingly chronic weakness in private consumption — a by-product of a rapidly aging population that faces the twin pressures of unrelenting job insecurity and a huge pension problem. Lacking in domestic demand growth, Korea continues to rely on an export-oriented growth strategy. And now it has hooked its export machine to the fortunes of China; in 2003, the growth of Korean exports to China accounted for fully 45% of the total increase in Korean exports. What's especially interesting about the downturn in Korean exports is that it has yet to reflect the impacts of the China slowdown; the first leg of the export weakness appears to be driven more by the decline in semiconductor pricing. To the extent that the China slowdown gathers force, additional weakening of Korean exports is likely. And that will only tip the risks of this externally dependent economy further to the downside. |
