Tag Archives: Export

South Korea’s export boost and its exchange rate

In my previous blog post South Korean Exchange Rate, I analyzed how South Korean exchange rate fluctuated over last few years and affected my “college life”. I decided to come to US when Korean Won-US dollar exchange rate was around 900Won per dollar in 2008, but decided to go back to Korea to fulfill military service for two years when exchange rate rose to over 1532.8 Won per dollar in early 2009. My parents had to send 77million Won instead of 45million Won per year to pay my tuition, and I thought it was a good time to fulfill military service in Korea and wait for won-dollar exchange rate to settle down.

Nonetheless, it was a good decision. The exchange rate settled down to around 1100 won per dollar by the time I got discharged from Korean army and returned to University of Michigan. As shown in the graph from FRED below, won-dollar exchange rate fall to 1035.4 won per dollar this April. It is the lowest since August 2008, yet IMF believes South Korea won is still undervalued. According to the Wall Street Journal Article IMF Says South Korea Won Undervalued, South Korea’s won currency could be up to 8% undervalued and urged authorities to refrain from intervening in currency markets.

exchange rate

In particular, US treasury this week called on South Korea to limit its interventions in foreign exchange markets, as it believes that South Korea currency is unfairly cheap, making US exports more costly by comparison. However, the main reason for United States’ trade deficit with Korea is due to its free trade agreement. According to the news article from New Hampshire Business Review The U.S. should think twice about yet another free trade deal, United States’ trade deficit with Korea has increased $8.7 billion or 59.6%, costing nearly 600,000 U.S jobs after the FTA was established. Furthermore, the graph below which shows value of total exported goods exported by Korea tells us that Korea’s export has no strong correlation; when Korean won was weakest (year 2009), the quantity of export is lower then what the quantity of export in year 2014, when Korean won is relatively stronger.

export value

 

Although it is true that weaker currency can help a country to boost its trade surplus, I do not think that Korea’s recent trade boost is due to its “weak” currency. From the two graphs we can see that Korea’s currency has been appreciating since year 2009, yet its export quantity has been increasing as well. I may be biased (as I am Korean), but I think it is bit harsh for IMF to tell Korea to stop intervening in its currency saying Korea’s export boost is due to its weak currency. Korean companies have been producing fine products, from electronics to cars, and I think this is the main reason for the boost in export; not weak currency.

(revised) US’s outlook for Natural gas exporting

The current conflict in Ukraine is attracting a lot attention. Weeks ago, in order to against the counter force from EU countries, Mr. Putin played his trump card: raise the natural gas price in Ukraine. As a big country that riches in all kinds of natural resources especially energy, Russia has been holding the pipelines that transfer natural gas into EU and making the dominate strategy in this game. It is reported that more than 30% of gas in EU is provided by Russia.

So far the west have threated to commit sanctions on Russia’s action of occupying the Crimea region, however due to the problem of natural gas, those commitments are more like to be non-credible threatens. The head countries in EU like UK and German are bounded by such a concern, and the graph below from NYT can shows that major buyers of the Gazprom – Russia’s largest state-owned natural gas company.

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We can see that German and Britain are in the list. Actually according to this article in WSJ, Six countries in Europe import 100% of their gas from Russia, and an additional seven rely on it for at least half. It is beyond doubt that Russia has its considerable influence on the attitudes of the EU countries on this affair. U.K. Foreign Secretary William Hague said European nations may need to “recast their approach” to Russian energy purchases if the crisis isn’t resolved.

Also reported in WSJ, Obama’s government is taking measures to curb the Russia’s stranglehold over EU’s natural gas supply. US is currently one of the biggest natural gas production nations in the world due to one of its most advancing tech in this field names fracking. The strategy is increasing natural gas exporting to EU from US thus undercut natural gas imported from Russia. Compare to Russia, US has big cost advantage. As the graph from BP’s official site showed below, natural gas price keeps falling over recent years in North America. The price in US is far lower than that of Asia and Europe.

In this strategy of US, big oil and gas production firms like ExxonMobil benefit a lot from it, while environmentalists and small manufacturing companies strongly oppose such a claim. In my point of view, it is unstoppable for US government to apply this strategy.

There are several reasons why US didn’t doing so in the past:

1, Exporting more natural gas will increase the price of it in US. Currently the natural gas price in US is almost 1/5 of that in Japan, which is a big advantage for US manufacturing industries that rely heavily on gas as raw material. More export means less gas available in US, and the price will likely rise.

2, Protecting domestic natural resources and environment. Natural gas is a crucial strategic resource that its export needs to be limited. Also the large-scale exploiting of gas can cause severe environment problem.

3, Technology limitation. Since the gas exploiting technology in the past is not so advanced, the available gas reserves were bounded. People were afraid of gas shortage once they export more natural gas to foreign countries.

However, the current situations are changed dramatically. So it’s a good time for US to develop its gas export industry for several reasons:

1, Boom in natural gas reserves. Thanks to the new tech named “fracking”, now there are more gas available underground that can be exploited and meet the exporting need.

2, Increase domestic gas price. Because of the increase in gas reserves, now the prices are too low to let gas production firms making profits. Economically, it is needed to increase export to raise domestic prices and develop gas transmission infrastructures.

3, Curbing Russia’s power over EU. The political pressure in Ukraine is the main push force for US’s decision of increasing gas export.

Overall, the US strategy is a good news for the reason that it may help a lot to the establishment of the global natural gas market, which will benefit the people around the world and accelerate the process of clear energy movement.

 

Zoom in on trade deficit in China

When I saw the news that China had reported a huge trade deficit of $22.98 billion in February, I was almost shocked. This figure give a grim outlook for Chinese economy in 2014, especially in light of the sweeping economic reforms announced at November that would dampen short term economic growth.

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The reform, if carry out with the great determination by the Party, will invariably  slow down domestic investment, because it guarantee to break up state enterprise monopolies and wean them off cheap credit, meanwhile encouraging a more consumption-driven economy. The unemployment rate will looks bad for 2014. My worry is that, if export, the second work horse for Chinese economy, continue to shrink based on February figure, the party might grow more concerned about social instability and postpone the long overdue reform to a longer horizon.

Luckily, some analysts suggested that there are at least two reasons for us to be not so pessimistic.  

First, the dismal figure might be distorted by the timing of the Chinese Lunar New Year holiday , as manufacturers often speed shipments ahead of the long holiday when migrant workers return home and production lines fall silent.

Second, the over-invoicing by exporters last year inflated the base for comparison in February and this will continue for a few more months. Exports surged nearly 22% year on year in February 2013, and the number were widely believed to have been distorted by false invoices from exporters who wanted to bring foreign currency onshore. This is know as the hot money, which aimed at taking advantage of higher interest rates and an appreciating Chinese currency. Due to this false invoicing, the trade result  could continue to be inaccurate for a few more months.

Third, there was strong demand for resources, a major indicator of China’s industrial appetite. Importers continued to build stockpiles and take advantage of low global prices. Crude-oil imports rose 11% from a year earlier, while iron ore imports also were up 22% from February last year. Soybean and copper imports also rose by double-digit margins in the period. Still, volumes in all these major categories fell from January’s record-setting volumes, in part because of the shorter working period due to the Lunar New Year holidays.

Despite these relieving analysis, I still think that economists’ forecast that far-missed the target to be unjustified. When economist made forecast, didn’t they already factor in the impact of Lunar new year? Why they didn’t adjust the data for a inflated basis? Accurate forecast must be based on accurate historical figures that are adjusted for all the observable factors. For now we could only hope that export won’t be this bad for later months.

Countdown to Currency Reform in China

In today’s class, we discussed the impact of exchange rate on international trade. Basically, a weak domestic currency tends to drive up the country’s net export and stimulate economic growth. For instance, if the U.S. dollar is weakening against major foreign currencies, it will make American goods and services cheaper to foreign buyers, leading to higher demand abroad.

Now let’s take a look at China, the world’s second largest economy, and the Chinese yuan. The country has been growing rapidly in the past two decades in spite of a slowdown in recent years, and one of the key factors of growth is export. China is known as an export-dependent country for a long period based on its cheap labor cost and loose regulation of environmental preservation. In addition, the weak currency contributed to its export by further lowering the cost when selling aboard. After the political transition in 2013, the newly-established administration pledged to let the market play a bigger role in the nation’s economy, and currency reform, which allows greater flexibility of the yuan, is certainly one of the critical financial changes on the to-do list.

So why does China have to conduct such a reform?

First, it could restore the country’s reputation when it comes to international trade. China has been under criticism for manipulating the yuan for export, shown by its international payments imbalance and tremendous accumulation of reserves by its central bank. As a result, trading partnerships between the nation and the rest of world became intense and many hawks in developed countries treated the weak yuan as the cause of high unemployment rates. To be honest, I think some of such claims were just political tactics but still, China’s currency reform could be a feasible way to ease the tension and promote the country’s image as a responsible player in international trade.

Second, it could curb speculative capital inflows. China’s capital- and financial-account, a measure of how much money foreign investors poured into the world’s second-largest economy, swung to a surplus of $242.7 billion last year from a deficit of $16.8 billion in 2012, and meanwhile, the current account, representing mainly trade payments, remained in surplus in 2013, though that shrank to $188.6 billion from $193.1 billion a year earlier. Comparatively, more inflows were derived from investment capital rather than trade. As Ding Shuang, a Citigroup economist said: “What the authorities need to do is to enhance the flexibility of the yuan exchange rate to increase the costs of speculative capital inflows.”