In the third quarter of 2022, the prosperity level of the six countries of ASEAN further rebounded, but the prosperity level of South Korea fell. The overall manufacturing PMI of ASEAN and the six ASEAN countries was above the boom and bust line in July and August, with Indonesia and Thailand rebounding, Philippines and Vietnam slightly pullback . South Korea's PMI fell from the boom-bust line to 49.8 in July, and fell further to 47.6 in August, the low point since July 2020. The indicators for measuring economic external demand and domestic demand weakened across the board. South Korea is the "canary" of the global economy of . The slowdown in foreign demand reflected by its slowdown in exports may be the pressure that all countries in the region will face in the future. In the third quarter of 2022, the inflation level of the six ASEAN countries and South Korea showed an upward trend. Inflation in the region, , two major developed economies in South Korea and Singapore, has risen particularly significantly. Although the monetary policy of the central banks of various countries in the region is relatively tight, the pace is different. Although inflation levels rise, the inflation level in this region is still lower than that in other regions around the world, but we need to pay attention to future upward risks: First, energy prices may rise this winter, and second, the prices of staple food rice in the region may rise. Under the Fed rate hike and the strong US dollar, the currency in the region generally continued its depreciation trend in the second quarter in the third quarter, but the depreciation degree was different. The pressure of depreciation will still be under subsequent depreciation, but the possibility of a crisis caused by depreciation in the region is small. August 24, 2022 marks the 30th anniversary of the establishment of diplomatic relations between China and South Korea. This report finally reviews and looks forward to the economic and trade relations between China and South Korea over the past 30 years.
1. ASEAN's prosperity level is relatively high, and South Korea's prosperity level declined
In the third quarter of 2022, the prosperity level of the six ASEAN countries was relatively high. ASEAN's overall manufacturing PMI in the third quarter of 2022 was basically the same as in the second quarter, with 52.2 and 52.3 in July and August respectively, both above the boom-bust line. The manufacturing PMI of each of the six ASEAN countries was also above the boom and bust line in July and August. Among them, PMI in Indonesia and Thailand continued to rebound compared with the second quarter, while PMI in the Philippines and Vietnam rebounded compared with the second quarter. The rise in Indonesia's economic prosperity is mainly due to the rise in the global price of commodity , mainly due to the rise in the prices of palm oil , coal and natural gas. Indonesia's commodity exports increased by 30.2% year-on-year in August, and the trade surplus expanded from US$4.2 billion in July to US$5.8 billion in August. The rise in Thailand's manufacturing PMI level reflects the accelerated improvement of its manufacturing industry. The pullback in the PMI in the Philippines and Vietnam is mainly related to the rise in inflation levels caused by rising energy and food prices. In fact, the rise in inflation levels in the region and the expectation of more austerity policies will have a sustained impact on the prosperity level of economies in the region.
In the third quarter of 2022, South Korea's economic level fell. South Korea's economy encountered a headwind in the third quarter of 2022. From the perspective of manufacturing PMI level, the PMI fell from the boom-bust line in July to 49.8, and fell further to 47.6 in August, the low point since July 2020. South Korea's economy has weakened in recent days, with export growth slowing to 6.6% year-on-year in August. Retail, industrial production and equipment investment in July negative growth compared with , reflecting that both domestic and foreign demand is relatively weak. South Korea's economic slowdown has been affected by high energy costs. In response to the Fed's hike rate hike rate hike rate hike rate hike rate hike rate hike policy has also had a suppressive effect on domestic household and business spending. In the early stage, the leverage ratio of in the private sector in South Korea has been relatively high, and financial vulnerability has increased recently. The depreciation of the Korean won also further push up inflation and weaken domestic demand. As the "canary" of the global economy, the recession of South Korea's economy is worth paying attention to. Among the major products exported by South Korea, computer, mobile phone and petrochemical products all saw double-digit year-on-year declines in August, reflecting the slowdown in global consumer demand. Taking into account the situation in other open economies, this slowdown may have just begun. The slowdown in global demand is also a pressure that ASEAN countries and South Korea in the region will face in the future.
2. Inflation levels in areas rose, policy tightened
In the third quarter of 2022, the inflation level of the six ASEAN countries and South Korea showed an upward trend. From to August, the average core inflation of the district economy exceeded 3%.Among them, the inflation levels of developed economies in Singapore and South Korea were significantly higher than those in most developing economies in the region, which was not common in the past. The year-on-year growth rate of core inflation in Singapore in July and August was 4.8% and 5.1% respectively. The overall year-on-year growth rate of CPI in August reached 7.5%, far higher than the 2% price stability target of the Singapore Economic and Administration Bureau. The rise in Singapore's inflation level is related to supply chain problems. The recent rise is also driven by rising food and service prices, among which food prices account for about 21% of the overall consumer goods prices. In August, increased by 6.4% year-on-year. In addition, the reopening of the economy and the improvement of Singapore's position as a financial center have also brought about an increase in rents. South Korea's core inflation growth rate in July and August was 4.5% and 4.4% year-on-year, respectively, and remained above 4% for four consecutive months. However, inflation in August fell compared with July, and expectations of inflation peak began to appear. South Korea's inflation has risen for eight consecutive months, and the core factor behind it is still the rise in food and energy prices, among which energy imports account for more than 90% of South Korea's energy consumption. In addition, the depreciation of the Korean won and the rise in freight rates are also the reasons for the rise in prices of imported goods. Emerging economies in the region are also generally facing the impact of rising food and energy prices. The inflation level has increased significantly by and the Philippines, but the above factors have weakened since August.
Although the monetary policy is tight, the pace is different. Indonesian Central Bank implemented a rate hike action late. On August 23, the Indonesian Central Bank raised the rate of seven-day reverse repurchase by 25 basis points to 3.75%, completing the first rate hike since November 2018, and further raised the policy interest rate by 50 basis points to 4.25% on September 22. The above measures reflect that the central bank has further controlled inflation and stabilized the Indonesian rupee under the premise of relatively stable growth. Similar to Indonesia, the Bank of Thailand also raised interest rates late, and has only raised interest rates once so far, raising the policy interest rate by 25 basis points to 0.75% on August 10. Malaysia's rate hike began in May and raised interest rates once in July and September, at 25 basis points each time, with an overnight policy rate raising a total of 75 basis points to 2.5%. The Monetary Authority of Singapore announced the tightening of monetary policy in October 2021, starting this round of tightening cycle. Generally, the HKMA adjusts its monetary policy in April and October each year, but there have been two additional adjustments (January and July) and one regular adjustment (April). In January 2022, the appreciation slope of the SGD nominal effective exchange rate (NEER) was adjusted, the appreciation range of the NEER was adjusted upward in April, and the central axis of NEER was raised in July. It is expected that its monetary policy will continue to be tightened in October. The central bank of the Philippines completed five interest rate hikes this year. At the latest monetary policy meeting on September 22, the policy interest rate was raised by 50 basis points to 4.25%, which is relatively close to the level of 4.75% before the pandemic. The more aggressive interest rate hikes are closely related to the higher domestic inflation and the pressure on Philippine Peso . The Vietnamese central bank completed its first interest rate hike since the pandemic on September 22, raising the main policy interest rate by 100 basis points from 4% to 5%. Policy changes reflect the concerns about stabilizing Vietnamese Dong . The Bank of South Korea implemented an unprecedented 50 basis points rate hike in July and raised the policy interest rate by another 25 basis points in August. At present, concerns about the depreciation of the won still remain expectations for South Korea's sharp interest rate hikes in the future. Although the central bank governor stressed that hiring interest rates alone cannot solve the exchange rate problem, this shows that South Korea is in a dilemma of stabilizing currency and stabilizing growth to a certain extent.
The inflation level in this region is still lower than that in other regions around the world, but specific risks need to be paid attention to. Although inflation has risen, whether it is a developed economy in this region or a new and developing economy, it is still lower than that in other regional economies in the world. This provides space for monetary policy and contributes to the stability of the regional economy. Although inflation has peaked in August, inflation levels may stabilize at high levels for the rest of 2022, and its marginal weakening trend is not expected to accelerate too quickly. The upward risks of inflation in the region mainly come from: First, the input effect brought about by the upward trend of energy prices this winter. Second, the price of rice may rise.An important factor in the low inflation level in this region is that rice accounts for a high proportion of staple food, and rice produced and consumed in Asia accounts for about 90% of the world. Compared with the surge in grain prices such as wheat and corn caused by the Russian-Ukrainian conflict, rice has been less affected. However, due to factors such as animal feed replacement, rising fertilizer costs, and potential extreme climate, rice prices may rise, thereby pushing up food prices in this region.
3. exchange rate continues to adjust downward
In the third quarter, the currency in the region generally continued the depreciation trend against the US dollar in the second quarter, but the depreciation degree is different. With the strongest trend in 20 years in the index , the currency in the region generally depreciated against the US dollar in the third quarter. Among the currencies in the region, only the Indonesian rupee remained relatively stable in the third quarter. South Korea became the worst-performing currency in the region, depreciating continuously by 6.4% and 7.9% against the US dollar in the second and third quarters. The Philippines and Thailand also depreciated significantly, depreciating by 5.9% and 4.8% respectively in the third quarter. The reason for the depreciation is similar to last quarter. First, it is still that the pace of Fed rate hikes has not stopped. The strong US dollar has brought about a weakening of the currency in the region compared with the US dollar; secondly, the trade of economies in the region, especially exports, has slowed down, which has brought pressure on the balance of payments; finally, currencies such as the yen and RMB in the region also depreciated against the US dollar, causing the depreciation of each currency to have a synergistic effect. Judging from the subsequent situation, the Federal Reserve's attitude towards inflation is still tough, and foreign demand has not been positive in a short period of time. Therefore, the currency in the region may continue to be under depreciation pressure in the fourth quarter of 2022. Judging from the current situation, although currency depreciation has caused concerns about whether the Asian financial crisis will reappear to a certain extent, the more flexible exchange rate and monetary policies of various countries, a more comprehensive financial security network and the implementation of macro-prudential management have made the major economies in the region still have a small possibility of crisis caused by depreciation. Major financial risks remain concentrated in smaller middle- and low-income economies in the region.
4. Review and Outlook on China-South Korea Economic and Trade Relations
This year marks the 30th anniversary of the establishment of diplomatic relations between China and South Korea. In the past 30 years, China-South Korea economic and trade relations have made great progress. The scale of import and export of goods between China and South Korea has increased by more than 40 times in the past three decades, setting a new high in 2021, reaching US$364.1 billion. Among them, China's exports to South Korea are about US$150 billion, and imports from South Korea exceed US$210 billion. From a historical perspective, unlike China's overall export surplus pattern, the trade between China and South Korea continues to show a deficit pattern, that is, imports are greater than exports. The Chinese market is an important source of South Korea's economy maintaining its surplus. However, this situation was reversed in 2022, and South Korea has a deficit with China. In terms of trade scale, South Korea is expected to surpass Japan to become China's second largest trading partner after the United States in 2022.
China and South Korea are important trading partners of each other. From China's perspective, in most of the time in recent years, South Korea has been China's third largest export destination, second only to the United States and Japan. In 2020, it was briefly surpassed by Vietnam to rank fourth. South Korea is also China's largest source of imports, and this status was achieved after 2012. Previously, China's largest source of imports continued to be Japan, which means that after China's economy embarked on a structured transformation process, South Korea's importance has further increased. From South Korea's perspective, China's ranking in South Korea's import and export has increased significantly in the past three decades. In the two years before the establishment of diplomatic relations between China and South Korea, China's export destination was not important because it was located in South Korea. It ranked 17th and imports ranked 5th. After the establishment of diplomatic relations, the status rose rapidly. Since 2003, China has been South Korea's largest export destination, and since 2007, China has also become South Korea's largest import source. This status has been very stable over the past decade. The structure of Chinese and Korean export products has also undergone significant changes.First, the changes in export products reflect that China-South Korea's economic and trade structure has been continuously optimized and upgraded in the past 30 years. In 2000, China's exports to South Korea included labor-intensive products such as clothing and textiles, as well as primary product . Now the export of these two types of products is no longer important; second, the export of both sides in some fields has relatively stable characteristics, such as electrical machinery is the most important in both sides' exports, and China's office equipment, steel in exports to South Korea, as well as organic chemicals and plastics in exports from South Korea to China; third, the cross-sectional characteristics of both sides' exports are prominent, reflecting the division of labor and complementary characteristics of regional value chains in trade and investment between the two sides.
In terms of economic and trade policies, China and South Korea have signed the China-South Korea Free Trade Agreement and are negotiating the upgraded version of the agreement. In the field of investment, China and South Korea signed a bilateral agreement to promote and protect investment in 2007. In the financial field, China and South Korea have entered into a currency swap agreement. The initial currency swap between China and South Korea was concluded under the framework of the Chiang Mai Initiative in 2000. During the global financial crisis in 2008, China and South Korea entered into a bilateral currency swap agreement with a scale of RMB 180 billion/38 trillion won. During this period, scale expansion and extension will be carried out, and trade financing will be supported using swap agreements. The latest swap scale in October 2020 is RMB 368.8 billion (70 trillion won), and the agreement is valid for five years. In addition, the two sides have four ministerial-level bilateral economic and trade consultation mechanisms.
Looking forward to the future, China and South Korea can further strengthen economic and trade cooperation, build higher-level economic and trade rules between China and South Korea and within the region, and further release economic and trade potential. Specifically, the second phase of the China-South Korea Free Trade Zone negotiations can be completed as soon as possible in the field of trade and investment, and consider upgrading the China-South Korea bilateral investment agreement; the possibility of cooperation between the two countries in the supply chain field can be deeply sorted out; in the field of technology, there is room for further improvement in cooperation between China and South Korea in the field of intellectual property rights; in the field of finance, China and South Korea should further tap the potential of bilateral exchanges and strengthen regional cooperation .
