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Permalink Reply by stephanemot on June 24, 2010 at 10:03am

I guess one of the key issues for Korea is the consequences the USD-KRW couple. Not the rate itself, but the relative weight of US currency in Korean affairs.

Common currency projects will also resurface, with other players.

Permalink Reply by Robert Eberenz on June 24, 2010 at 10:12am

The relative weight of the USD in Korea is indeed a crucial dynamic, and is becoming more important as Korea continues to boost it's USD reserves above $270 billion USD. The rate does have direct implications on Korean business however, as the exchange rate determines the purchasing power of households and firms balanced with the competitiveness of Korean exports abroad.

Permalink Reply by Robert Eberenz on June 24, 2010 at 10:14am

The focus of this week's report centers on the news from China of a Renminbi revaluation, to take place over the course of this year. China has announced the Renminbi will rise relative to the dollar up to 1.5% by December 2010. I've taken the stance that a higher Renminbi (Yuan) is good for Korea's economy...

Do you agree or would a weaker Yuan benefit Korea more?

Also stop by to get a review and preview of market moving economic reports, sure to move Korean stocks during the next week of trading!

Permalink Reply by Matthew Smith on July 17, 2010 at 1:25pm

In order for China to stay competitive and maintain it's current growth, will they adopt a policy similar to Japan's, placing large tariffs on imported goods?

I'm not sure about the Korea-China relationship, but it seems there is some favoratism towards exporting to the U.S. Is this the reason for the indirect tie to the USD?

Permalink Reply by Ondrej Slechta on June 24, 2010 at 5:06pm

The key question is what is (or more precisely what will be) the structure of Korean exports to China. With stronger RMB China will be purchasing more Korean final products but Chinese goods will be less price competitive globally. The part of Korean exports to China which includes semi-products in the middle of the value chain will be affected negatively.

Permalink Reply by Steven S. Bammel on June 24, 2010 at 5:12pm

It's interesting to see the Chinese government announcing these changes at the same time that labor in China appears to be getting the upper hand in wage negotiations, in particular following the string of suicides at that huge suppler to some of the leading Western MNCs.

Won't this kind of double the impact in terms of price competitiveness for Korean manufacturers? Or am I over-reading the Chinese labor developments?

Permalink Reply by stephanemot on June 24, 2010 at 7:03pm

Korea faced similar labor clashes a couple of decades ago, but at a different scale and with a different context.

you also want to keep an eye on both growth and inflation rates.

Permalink Reply by Robert Eberenz on June 25, 2010 at 7:18am

Inflation is indeed a major threat in China. Broad money supply (m2) in China is expected to grow by 17% in 2010. This combined with soaring real estate prices and manufacturing growth exceeding estimates are becoming more of a curse than a blessing, where analysts have begun fearing the economic fall that may follow such a rise.

http://www.chinadaily.com.cn/bizchina/2010-06/19/content_9992505.htm

Permalink Reply by Robert Eberenz on June 25, 2010 at 7:15am

Ondrej, I definitely agree that depending on the price competitiveness of final goods, certain exports from china will suffer and by default effect the semi-product exports from Korea. How much of the semi product export market from Korea to China represented much of Korea's exports? I'll try to do a bit of hunting to get us some numbers...

Permalink Reply by Peter A. Underwood on July 7, 2010 at 4:34pm

The figure I have heard most often was that 50% of Korea's exports to China is intermediate goods that were assembled into finished products and re-exported to third countries. However, with the global economic crisis over the past 18 months eroding China's exports and the resulting Chinese policy to encourage domestic consumption, the percentage of Korean inputs consumed in China has increased and for re-exports has fallen. However, I have not seen updated figures in the last year or so.

Having said that, the competitiveness of Korean inputs should improve. If the Yuan rises and the KRW stays constant, Korean inputs would become cheaper to local consumers and cost neutral for re-exported Chinese manufactured goods.

Permalink Reply by Ondrej Slechta on July 8, 2010 at 7:07am

So we've got about 11% of total Korean exports being hurt by CNY appreciation while another 50% shall grow driven by increased Chinese domestic consumption. In addition, Korean goods shall become more price competitive globally with Korean companies gaining larger global market share at the expense of Chinese firms.

But Korean and Chinese exports have been highly correlated in the past - this would suggest rather minor impact of CNY appreciation upon KRW. Especially as the expected CNY appreciation is not that high, that is at least in the short run. My colleague Ben Simpfendorfer has said that the CNY’s annual appreciation is unlikely to exceed 3% p.a.

So if KRW goes up, it probably won't be due to CNY appreciation. I guess we'll see later today what's going to happen to the interest rate!

Permalink Reply by Robert Eberenz on July 8, 2010 at 7:26am

Agreed on all points Ondrej... The interest rate decision holds a lot more in the balance for Korean stock prices and the economy as a whole...

Check out this weeks Korea Economic Slice, "Stimulus Benefits vs. Monetary Risks". Here we review the Korea stimulus and look to quantify the effects of monetary policy from the current 2.0% core Bank of Korea rate.

Will Korea follow some of it's less developed SE Asian neighbors and raise it's BOK rate? I say "no", that it holds at 2.0%. What do readers think?

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