Friday, November 11, 2011

Taking The Euro Crisis In Perspective

It is daunting and mortifying trying to take into account whats happening in Greece, and then Italy... and I am sure Spain is next. Markets will be volatile in the coming weeks and months. The big TARP-like fund is critical to stabilising the region, so hearsay and rumours about some disagreements over it will always spook the markets.
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However, we also should know that the EU have its backs to the wall. If they let Greece out of EU and the euro, that will trigger an avalanche because nobody will offer any haircuts anymore - lending rates will soar for troubled European nations and their sovereign bonds will plummet, forcing the troubled ones to get out as well ... the consequences are too dire to reverse everything.

The disagreements still have a long time to go to be ironed out as the fund would only come into effect mid-next year, so they have a lot of time to agree to disagree for sometime. Its just grandstanding, each side trying to get the "safest" deal for their governments and affected corporations.
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Hence we have to learn to live with the volatility. But we also have to find out for ourselves just how dire the situation can get. To get a better perspective, lets look at trading between China and its major partners (annually):
imports from HK $10bn, exports to HK $227bn (51.3%) 
imports from South Korea $143bn, exports to South Korea $72bn (24.5%)
imports from Japan $183bn, exports to Japan $125bn (21.8%)
imports from Australia $62bn, exports to Australia $29bn (22.5%)
imports from the US$106bn, exports to the US $296bn (14.9%)
imports from the EU $176bn, exports to the EU $325bn (13.9%)
imports from Malaysia $25bn, exports to Malaysia $52bn (17.9%)
imports from India $22bn, exports to India $43bn (11.4%)
imports from Brazil  $40bn, exports to Brazil $26bn (14.9%)
imports from Singapore $26bn, exports to Singapore $33bn (11.1%)

If you take the time to go through the figures, you will find that China is a much bigger partner for most nations. Yes, the EU is important but not terribly so. It would be devastating for Asia if problems similar to the EU-crisis were to hit China.

Hence we can surmise that China may take a minor hit from the current situation but there are plenty of others to take up the slack. Look at Brazil, its importing a lot more there than exporting to Brazil, and you can extrapolate that for the rest of Latin America, which is to say Latam will be taking up a lot of slack for the next few years to keep China chugging along.
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The percentage figure in parentheses are the percentage of trade with China by that specific country. Without China, HK is basically kaput, but Japan, South Korea and Australia are potential big victims in a China calamity.

In that perspective, we may be able to reassure ourselves a bit more that most of the rest of global markets have "already fallen in sympathy" with the EU crisis. Any further shocks from the EU will tend to affect EU markets a lot more than the rest. 


mr. lim said...

I am glad you take the initiative to highlight the important of China compare to Europe in terms of trade. This shows that any glitches in EURO, the effect in Asia is not that serious. But I do not understand why share market is so jittery when bad news from Greece and Italy start flying around.
Personally to me EURO is too big to fail and no matter how bad the members countries financial situation is, they will have to come out with a solution so as to make sure EURO is safe and intact.

Alex said...

EU seems to be China's largest trading partner this year. If EU falter, I'm afraid China would skelter and so would rest of Asia. Well, of course, we would be cushioned by being small?

Mohammed said...

The problem lies not mainly with trading exposure between sovereigns, but rather with the exposure of financial intermediaries who lent to effectively insolvent governments in Southern Europe.

The cascading effects of potentially bankrupt banks is what bothers the financial markets.

Bonescythe said...

2nd picture not bad :)
Good angle!

CK said...


Good comparison, using China as a bench mark.

But...but, a better comparison would be using Euro/USA's export/import figures with their respective trading partners, vis-a-vis yr China comparison methodology.

A clearer picture should then be revealed about the contagious effects of the Euro/USA economical malaise to the world as a whole.

The world is connected, not only via internet, it's also supported via the blood flow of interconnecting trading activities.

Yes, Euro/USA is too big to fail. But their prolonged financial malaise will make the poors of the 3rd world suffer that much more & longer.

There is TRUE in the maxim of the chaos theory - when a butterfly flips its wings in Atlanta, it would cause a storm in Shenzhen, the farside of the Earth.

Stock Price said...

Well it seems that Eu is the largest trading partner, but how the crisis happens, I think it's a very serious situation.

Unknown said...

Hi I am your blog fans and been following since some time..Thanks.

Well I been heard of the two emerging market, China and India. I see you put your opinion on China and I hope to learn from you about your opinion on India as well so that I could have a general idea..

Thanks ya.Take care.

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