Hub or Cog?

Why Singapore’s trade diversity is key to its economic success  |  Singapore’s export trade has grown by 275% and its imports by more than 240% since 2001. As a measure of this, perhaps, its fifth largest import sector is cranes and crane components accounting by itself for $US7.6bn of Singapore’s imports. But the fact that the sector is also Singapore’s fifth largest export sector accounting for some $US 6.6 bn suggests that Singapore is more than a hub; it is also a cog in Asia’s trade machine adding value to the goods it imports and distributing that value across the region and beyond. It is this that makes it both dynamic and potentially vulnerable to any apparent slow-down in economic or trade growth forecast for this year.

Singapore’s stock exchange and its currency are highly correlated. With the STI, the value of the correlation coefficient over the past 12 years is 0.87, but with its currency’s value per US Dollar, the correlation is even higher at -0.97, as illustrated in Figure 1. In other words, as the Singapore Dollar strengthens against the US Dollar (i.e. one dollar buys fewer Singapore Dollars), trade rises and vice versa.



Figure 1  |  Singapore exports (USDm) June 2001-April 2015 versus Singapore Dollars per USD, Last Price Monthly, June 2001-April 2014
Source  |  DeltaMetrics 2014, Bloomberg


These correlations are important because they illustrate just how inter-dependent investment, trade and economic strength (measured through the value of the currency) are for Singapore.

This contrasts starkly with the other major trading hub in the Asia-Pacific region: Hong Kong. While the correlation between Hong Kong’s exports and the Hang Seng is very high at 0.89, the correlation with its currency against the US dollar is low at -0.51 – illustrated in Figure 2.



Figure 2  |  Hong Kong exports, USDm value, June 2001-April 2015 vs HKD per USD Last Price Monthly, June 2001 – April 2014
Source  |  DeltaMetrics 2014, Bloomberg


This suggests two things: first, that both Singapore’s and Hong Kong’s role as a trading hub is important in determining investment in their key equity markets. Second, the relationships between core indicators of economic virility are quite different in Singapore and Hong Kong – while Singapore’s currency appears to be linked absolutely with its trade performance, Hong Kong’s does not.

This is replicated across other asset prices as well, illustrated in Figure 3’s infographic. What the chart shows is that Singapore’s trade is mildly more correlated with Emerging Market equities and the MSCI Emerging Markets index but is mildly less correlated with the S&P 500. Neither is correlated with the Nikkei. Correlations with currencies, in contrast, are weaker except for two emerging markets currencies – the Thai Baht and the Singapore Dollar, and the Japanese Yen.


Figure 3  |  Correlations of Singapore and Hong Kong exports with selected Emerging Market and Global asset prices
Source  |  Delta Economics analysis


The difference in the magnitude of the correlations is small, but as it is consistent, it suggests that there is something in the role that trade plays that is different between the two countries. For example, Singapore’s top export sectors are refined oil, integrated circuits, printing and ancillary machinery, semi-conductors and crane machinery and parts. This reflects both Singapore’s role as an energy and infrastructure distribution hub, and as a cog, which adds value to imports before they are exported. Singapore semi-conductor export value in 2014 for example is expected to be US$9.3bn – nearly twice the value of its imports which we expect to be around US$4.3bn.

This role for innovation is particularly clear in pharmaceuticals where Singapore has been building capacity in its innovation system for nearly two decades. The medicines are its 7th largest export sector but they do not feature in the top 30 imports, suggesting domestic production is driving Singapore’s export strength in this sector, reflected in its strong correlation with the Nasdaq Index, as shown in Figure 4.



Figure 4  |  Singapore’s exports of pharmaceuticals (USDm eye secretions in dogs), June 2001-April 2015, versus Nasdaq Last Price Monthly values, June 2001-April 2014
Source  |  DeltaMetrics 2014, Bloomberg


Singapore has built its indigenous export capacity through its structures to support innovation and entrepreneurship as documented by Delta Economics and the ACCA. However, its role as an energy distribution hub underpins its economic strength, as measured by its currency value and illustrated in Figure 5. Again, the correlation is negative – in other words, as the USD buys less of the Singapore dollar, exports of oil increase, with some USD 88bn expected to be exported in 2014.



Figure 5  |  Singapore’s exports of mineral fuels (USDm), June 2001-April 2015 versus SGD per USD, Last Price Monthly, June 2001-April 2014
Source  |  DeltaMetrics 2014, Bloomberg


Four of Singapore’s top five export partners are within Asia: China, Hong Kong, Indonesia and Malaysia. Its fifth largest export destination is the US. Hong Kong’s top five export destinations are China, Germany, India, Japan and the USA. China dominates its export partners with an expect export value in 2014 of over $US 290bn. Germany, in second, is small in comparison and likely to account for just under $US 30bn in export values in 2014. And while Hong Kong is important as an export destination for Singapore, Singapore ranks 7th of Hong Kong’s export destinations.

If China’s trade is slowing, then both economies will be affected. Interestingly, although Singapore’s export trade is more diverse across its partners, its export trade is as highly correlated with Chinese export trade as Hong Kong’s at 0.97. This reinforces the importance of China as a nation to the region as a whole, and to its two trade hubs in particular, and while it is likely to affect Hong Kong more than Singapore, the mechanisms by which this happens may not be fully transparent. Nearly 10% of the total USD value of China’s top importers is accounted for by re-imports. These are goods coming into China that originate in China – i.e. from the semi-autonomous regions that form China as a whole. China is Hong Kong’s largest export destination, but does not appear as an importer into China.

The transmission mechanism by which any contagion from China’s slow-down will spread is more likely to be measurable through the Singapore-Hong Kong trade route and the value of the Singapore Dollar against the US dollar. For example, exports to Hong Kong from Singapore are highly negatively correlated with the value of the Singapore Dollar per US dollar at -0.97. If the value of emerging market currencies were to slide against the US dollar further as the result of, say, further Chinese bond defaults, this would have an immediate negative effect on Singapore’s distributive trade across the region through Singapore because of the high correlation of its currency with both its trade generally and its trade with Hong Kong in particular.

It is imperative, therefore, that policy makers in Singapore continue to focus on the “Cog” rather than the “hub” approach to developing Singapore’s trade. As a trade cog, Singapore adds value to its imports through its innovation, particularly in its port technology to enable oil distribution, electronics and pharmaceuticals. As Figure 6 shows, there is a very high correlation between Singapore’s top four sectors and its currency which does not exist to the same extent In Singapore.



Figure 6  |  Correlation between Singapore and Hong Kong’s top export sectors and their national currency against the US Dollar
Source  |  Delta Economics analysis


In the end it is this diversity that will limit the direct spillover effects from a slow-down in China. Singapore has built an innovative and entrepreneurial base and the impact on its trade is beginning to filter through into its exports, measured both by its value-added and the strength of its correlations with indices like the Nasdaq. As a cog facilitating trade across the region and beyond, this is more likely to shield it from less favourable conditions that potentially threaten growth during 2014.

Bull in a China Shop?

China’s status as the world’s largest economy is no reason for hubris  |  China’s status as the world’s largest trading nation and, during 2014, as the world’s largest economy should be treated with caution by markets. It is still an emerging economy, faces manifest problems in terms of structural reform and has a difficult year ahead of it in terms of trade and economic growth. Observers would do well to treat the news about its size with the ambivalence it deserves: over-reaction, which is admittedly absent at present, could add further challenges to China as it seeks to impose major structural reforms without causing a sovereign debt crisis. It is no longer growing, either in trade or GDP terms at the rate that it was pre-crisis. This is a fact, and one that should concern markets more than the size of the Chinese economy, which does little more than beg the question, “so what?”

In October 2011, Delta Economics predicted that China would become the world’s largest goods trader by 2014. In January 2014, China officially became the world’s largest goods trader (1) in the world accounting for over 13% of world trade according to our estimations. Last week the World Bank (2) announced that China would also become the world’s biggest economy, in 2014, a fact which surprised many economists who had forecast that this would not happen until 2019; it also frustrated the Chinese government. There is some scepticism about the materiality of the numbers themselves because of the way in which they are calculated but, as Martin Wolf (3) points out, it is a reasonable, even an unsurprising conclusion and does not mean that China is the world’s most powerful economy.

The Delta Economics view is that China should indeed be regarded as an emerging economy. This means that analysts should be looking for evidence that its economic fundamentals are catching up with those of the developed world to justify investment decisions.

First, there is no better place to start than in a closer examination of the structure of its trade. China is not catching up quickly with either Germany or the United States in terms of the goods it imports and exports and, indeed its trade is becoming more concentrated in its top ten exported and imported products rather than less. In import terms, this means that it is still importing predominantly commodities and intermediate manufactured goods while in export terms, its exports are heavily concentrated in computers and intermediate machinery. As Figures 1a and 1b show, the fact that the “rest” component of the top 30 sectors has fallen so sharply, suggests that the reliance on these sectors in export and import terms has increased.


Bull in a China Shop  |  Figure 01a

 Figure 1a  |  Share of China’s top 10 export products as a percentage of its top 30 export products, 2014

Source  |  DeltaMetrics 2014

Bull in a China Shop  |  Figure 01b

 Figure 1b  |  Share of China’s top 10 import products as a percentage of its top 30 import products, 2014

Source  |  DeltaMetrics 2014

Figure 2 compares the structure of China’s trade with Brazil, India, Russia, Germany and the US in 2001 and 2014 using the Finger-Kreinin Index, which measures the similarity of the structure of exports between countries. Effectively it is a measure of how a country is catching up/competing with another in terms of its exports. The closer the value is to zero, the less similar the structure of exports is – in other words, the country comparator as few export sectors in common.


Bull in a China Shop  |  Figure 02


Figure 2  |  Finger-Kreinin Index for China’s export similarities with selected countries

Source  |  DeltaMetrics 2014

What the figure quite clearly shows is how different China’s structure of exports is to other countries, whether developed or emerging. It is more like a developed world economy that Brazil, India or Russia since electronic goods and intermediate goods dominate its exports as compared to the dominance of commodities in the other countries. Only India shows any sign of a major shift towards export similarity, but as the value is still low, at 0.13, the change does not suggest that India is competing directly with China.

Of more interest is the fact that neither Germany nor the US are similar in terms of their exports either. China has become more like the US over time, although it is still very different and Germany became mildly more similar immediately pre-crisis with slightly higher values (0.12) which is arguably because of a shift in German manufacturing out to China at that time which has since performer5 coupon code reversed. Similarly the biggest shift in the similarity of US export structure to Chinese was in the same period and has not yet reversed.

But the fact remains that neither selected emerging economies or the two other, largest, trading nations, are at all like China.

Second, while Barclays Capital, argues that China’s trade is not growing fast enough to keep investors happy, the effects of Hong Kong are dampening prospects for growth. Strip the effects of Hong Kong out, and export growth last year was 6.8%. This is very close to the Delta Economics similar estimate of Chinese export growth of 6.9% in 2013 suggesting that the Hong Kong factor is an important one to consider.

It is necessary to exercise caution when looking at the relationship between Hong Kong and China in trade terms. Because Hong Kong is a semi-autonomous region, it counts as part of China for some import and some export purposes. Thus, re-imports into China (which are the proportion of imports from, say, Hong Kong or China Macao that originate in China) grew from 4.5% of the share of top 30 importers into China to nearly 10% now.


Bull in a China Shop  |  Figure 03


Figure 3  |  Chinese exports to key port nations, USDm, June 2001 – January2016

Source  |  DeltaMetrics 2014

The figure shows Chinese exports to key port hub nations. Clearly it exports more to Hong Kong than it does to other port nations but this figure suggests two things: first, the volatility of China’s trade with Hong Kong has increased since 2009 and follows a regular pattern and second, that trade with Singapore and the Netherlands grew faster year-on-year in the first quarter of 2014 that exports to Hong Kong.

Third, the volatility in particular suggests that Chinese trade inflows and outflows themselves do not necessarily reflect the trade fundamentals, which have remained very similar since 2001. And yet, the Hang Seng index and Chinese exports are extremely highly correlated, with a value of 0.81 suggesting that this volatility may even be helping investors to predict where that market might go in the future, as illustrated in Figure 4.


Bull in a China Shop | Figure 04

Figure 4  |  Chinese exports versus Hang Seng, Last Price Monthly, June 2001 – March 2014

Source  |  DeltaMetrics 2014 and Bloomberg

It is this last point that is the most important. The correlation between markets and Chinese trade is strong, but much stronger for emerging markets than it is for developed world markets, even regional ones like the ASX 200 or the Nikkei (Figure 5) and, as shown in Figure 6, the relationship between the S&P 500 and Chinese exports is negative from the end of Q1 2013.

Bull in a China Shop | Figure 05

Figure 5  |  Correlation of Chinese exports with key regional markets and the S&P 500

Source  |  Delta Economics own analysis

Bull in a China Shop | Figure 06

Figure 6  |  Chinese exports (USDm, June 2001 – Dec 2014) vs S&P 500, Last Price Monthly, June 2001 – March 2014

Source  |  DeltaMetrics 2014 and Bloomberg

All of this illustrates the importance of China’s exports to emerging equity markets. These watch China’s economic indicators and react accordingly, perhaps because the emerging countries in the Asia-Pacific region are so dependent on China’s economic health. Interestingly there is a relatively weak correlation with the ASX 200 and one that turned negative in early 2010.

There are lessons for investors in both emerging markets and developed markets in this. For emerging markets the case is clear: China’s businesses are key to the growth of their own markets (whether in the real economy or money markets) and this drives capital inflows and outflows. Delta Economics has downgraded its forecast for Chinese trade in 2014 from 6.1% growth at the end of last year to 5.3% now suggesting a tough year for these markets.

For the developed world, the apparent bullishness is still not pricing in the risks in emerging markets. These risks are manifesting themselves through trade in the first instance but have the capacity to spill over into debt markets as well as disinflationary pressures and the potential for defaults become more evident. It might well be that these bulls could do themselves a lot of damage if they don’t look more closely at the Chinese shop.


(1) Anderlini, Jamil and Hornby, Lucy (January 10th 2014) | ‘China overtakes US as world’s largest goods trader‘ Financial Times

(2) Giles, Chris (April 30th 2014) | ‘China poised to pass US as world’s leading economic power this year‘ Financial Times

(3) Wolf, Martin (May 2nd 2014) | ‘China: On top of the world‘ Financial Times