BNY Mellon

Reserve Import Cover Shows Vulnerability

Although August macro data for APAC countries in general showed continued deterioration, one relative bright spot was tentative signs of stabilization in economic conditions in China. Aside from declining credit growth (aggregate financing eased 0.2ppt to 10.5%), China's activity data otherwise was encouraging. Examples of recovery signs came from fixed asset investment (5.8% y/y, +0.1ppt), industrial production (3.6% y/y ytd, +0.1ppt), and infrastructure investment (8.3% y/y ytd, +0.9ppt). And the year-to-date growth rate in retail sales was back in positive territory. The biggest drag on China's economy, however, remains the property sector. Property investment declined further, to -7.4% (-1.0ppt), and average home prices across 70 cities dropped for a twelfth consecutive month (-2.1% y/y in August).

Given ongoing efforts to ensure the implementation of policy measures already announced, we believe that China's underlying economic fundamentals should be able to withstand the complicated global environment – slowing growth momentum, aggressive tightening of monetary policies, substantial volatility in asset markets, etc.

Slowing external conditions, reflected particularly in falling exports growth, along with domestic growth recoveries and high commodity prices (elevated import growth) have continued to exert severe stress on APAC trade balances. As discussed previously (here), the exports shock is an increasing concern. India's exports in August grew 1.6% y/y while imports surged 37.3% y/y. Likewise, South Korea: exports up 6.6% y/y while imports jumped 28.2% y/y. The Philippines' exports in July fell 4.2% y/y against imports rising 21.5% y/y.

The repricing of global assets since the Federal Reserve's policy meeting last week has been significant. Alongside the market recalibrating a higher Fed terminal rate, the 2y US Treasury yield has spiked over 20bp since the meeting (up 75bp on the month) to around 4.30%. Aggressive tightening of Fed policy raises risks of a growth slowdown, which, in turn, exerts downside pressure on equity and bond prices. EM and APAC FX have additionally suffered on concerns around capital outflows. The chart and table below show APAC asset price changes since the beginning of the month, as well as FX volatilities in the region.

FX volatility plays a key role in the stability of financial markets across APAC. A weak currency would not only raise the prospect of inflationary pressure in the medium term but also, and crucially, run the spillover risk of triggering capital outflows from other assets.