China’s import growth recovered to 0% in May, which we attribute to a sharp increase in commodity imports. We think China’s rapid urbanization and eased inventory burden indicate that its commodity imports may  continue to increase, albeit at a slower pace than in May, which should help stabilize commodity prices and have a positive impact on EMs. While we think recovery in Korea’s exports to China is unlikely, in light of China’s policy shift away from the processing trade, Korea’s exports to EMs (ex-China) have a brighter outlook. Accordingly, we maintain our view that Korea’s export growth may turn positive YoY in 4Q16, on a customs cleared basis.

A recovery in China’s import growth and its implications 

China’s exports growth fell at a slightly faster pace in May, going from - 1.8% YoY in April to -4.1% YoY in May; meanwhile, import growth made a sharp recovery, going from -10.9% YoY in April to -0.4% YoY in May, the highest level since November 2014. We expect China’s recovering imports to play a significant role in the recovery of global trade. 

China’s imports of iron, copper ore, coal, and oil increased by around 20% YoY~40% YoY in May, marking a sharper increase compared with recent three months, whereas China’s imports from Asian manufacturing economies did not show significant improvement. Korea’s China-bound exports remained at around -10% YoY in May.

Reasons for slow recovery in Korea’s China-bound exports

China’s recent trade trends show a visible YoY recovery in ordinary trade growth and sluggish processing trade growth, at -15% YoY. We think recovery in Korea’s exports to China is unlikely, in light of: 1) the high share of parts and materials (about 75%) in Korea’s exports to China; and 2) China’s policy efforts to reduce its reliance on the processing trade. In addition, the decline in China’s imports of steel, chemicals, machinery, cars, and electrical and electronic products, all of which are major export products for Korea, is taking a toll on Korea’s China-bound exports.

Korea’s exports to EMs ex-China to recover

In order for its China-bound exports to recover, we think it is imperative for Korea to reduce its reliance on the processing trade. However, such a structural change would not be instantaneous. Accordingly, we expect any recovery in Korea’s exports to take place not through an increase in Chinabound exports, but via growing exports to EMs, which stand to benefit from China’s growing commodity imports. Despite a decline in the share of EMs in Korea’s export markets over the past few years, EMs excluding China still account for a large share (40%) of Korea’s exports, compared with DMs (35%). In all, we expect gradual improvement in Korea’s exports to advanced economies and recovery in exports to EMs excluding China.

Source: Mirae Asset Securities http://securities.miraeasset.co.kr/eng/jsp/main.jsp