Good morning from Poland 🇵🇱☀️ ! Shall we speak a bit about Asian economics, namely Asia & oil today?
Before we talk about Asia & oil, let's go through data we didn't (Friday was a holiday in Hong Kong & I was flying & don't forget that mainland China is off this week). Remember that China manufacturing PMI (state) was bad on power outages + demand.
But EM ex Asia doing better.
Notably, India is doing better, another month of expansion - we'll speak about why that will put some pressure on the current account. Indonesia great! Again, IDR is my favorite EM Asia FX at the moment for reasons u know - got better mobility + amazing trade + high yield. Good!!
Vietnam still doing very badly but that was September & the heat it got for shutting down factories will lead to normalization/living w/ the virus. Other ASEAN also doing better. Look at Malaysia. The Philippines also a bit better.
Overall, weak but trend is on the mend!
Now that you see some activity indicators, let's talk about oil & Asia. When people say that in the macro world, 2 things: impact on CPI and of course the balance of payment - can u afford high oil prices & what meaning to FX etc. What are the CPI trends? Not that high like PPI.
You can juxtapose Asian CPI with Western CPI (I'm in the West now but the East of the West, as in Eastern Europe), which went way higher & many much higher than in Asia. US CPI on par w/ India for example!!! But not just the US.
Anyway, back to Asia. PPI higher in Asia though!
Which will dominate? Higher costs via supply shocks or demand still dampened by Covid etc? We did a quantitative analysis & found that historically, Asian CPI is much more impacted by demand shocks.
We say (& been proven right so far) that CPI not a huge concern if demand down.
Now, how do u link news like higher oil prices/power shocks to structures of economies & distilling losers/winners.
1st, let's look at trade in Asia (chart show net): We import commodities & export manufactured goods for the most part as we're people rich & resource poor.👈🏻
So?
The largest deficit of commodity goes to China, Japan, South Korea etc. Basically the traders. They take their comparative advantage of people + capital & import commodities & add value to it & then export goods like textiles, electronics, cars, chips. China biggest trader of all
When oil/energy/commodities go higher, that means Asia's input costs go higher (by that I mean manufacturers') & u see that in PPI.
Note CPI hasn't gone up much as China CPI sub 1%. So? Manufacturers feel SQUEEZED. Hence PMIs terrible. Need to raise prices or reduce production.
News about China power outages is about how the industry is structured. Coal is key for electricity (>70% of electricity) but domestic coal production reduced + imported coal prices went higher + prices suppressed so few incentives to produce more for smaller players. So outages.
And that story is played out across the world for places with higher demand for power/commodity/energy but supply suppressed for many reasons (low investment due to change of energy strategy to less coal & more green etc). Choices must be made between prices & quantity of energy.
These aren't good choices. If u lower quantity consumed not through higher efficiency but sheer outages, then u got lower output of production/consumption (e.g. China). If u allow firms to raise power prices, then u got higher costs everywhere. No matter what, here are the losers
The losers are the net importers of fuels (orange in chart is fuels). They are everyone in Asia except Australia, Indonesia, and Malaysia (Brunei too but I don't use it). Tough choices ahead. Look at India. Not a huge trader but 3rd largest importer in Asia for consumption. And?
I explained last week that India source of electricity is coal (and also import oil for other uses) & coal reserves down. Meaning they have to face higher domestic auction prices or import expensive coal. Beyond coal, oil import is expensive too. Plus India demand is recovering!!
Preliminary data shows that merchandise exports rose 21% in September to USD33.4b, while imports jumped about 85% to $56.6, the trade ministry said. Oil imports surged 199% to $17.4bn!
Rupee weakened as a result. But don't despair, India should get decent capital inflows to help
And this is no BOP crisis (the ability to pay for imports) as India got plenty of reserves + capital flows likely decent.
Anyway, WINNERS? I pick Indonesia. Malaysia + Australia too but let me explain why not as good.
While Australia is the largest commodity trader in Asia - massive - it is mostly iron ore where it is getting its foreign FX. And iron ore is down as China curbs steel production + outlook on real estate sector meh (have u heard of Evergrande?) So? While fuels gain, iron ores sag
Malaysia also got goodies like natural gas etc but it also has tons of manu so its gains on natural gas is mitigated by the manufacturing sector sagged by higher input prices. Either way, still better off than the rest.
Indonesia is a clear gain. Got oil, natural gas, palm oil
You can see it in the bond market, FX etc that Indonesia is doing well & it remains my fav
Btw, u would have known this already if u followed my ASEAN supply chain note where I went through each country's trade structure.
U must know structure to decipher cyclical trends 🤗👈🏻.
Btw, equity analysts are cutting target prices of footwear stocks on supply issues on 4 October.
@Trinhnomics wrote a note on 12 August highlighting this will happen as ASEAN got Covid!!!
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First, we have to realize that Vietnam went through two stages of FDI.
The first stage is driven by NORTH ASIANS that are basically fed up with geopolitical tensions and too much competition from China (think Japan in 2010 w/ rare earth and South Korea with THAAD but even before) and so what do they do?
They MOVE their production base slowly out of China into where? Well, for South Korea, it was Vietnam.
Samsung Electronics moved into Vietnam in the early 2000s to the point now more than 50% of their stuff is exported out of Vietnam. But not only. Many other Korean stuff.
Also Japanese etc. So what you see in the telecom here is not CHINESE PHONES but KOREAN PHONES.
The second wave of course is Chinese outward FDI themselves and also increasingly EUROPEANS.
Anyway, let's talk about phones.
For phones, the key thing I want to show here is that while Vietnam exports have grown a lot, over time, the IMPORTS of that have DECLINED.
And they have declined everywhere. People that look at China all day long think Vietnam only trades with China.
No, Vietnam is a relatively big trader for its small economic size so it TRADES WITH MANY ECONOMIES, the US and also South Korea etc.
Long story short here is that Vietnam is importing less of inputs while exporting more and that tells you that overtime supply chains are DEEPENING THERE FOR THAT ITEM. And it's not transhipment.
But what's RISING in imports FROM EVERYONE? WELL, capital intensive stuff. Vietnam is importing a lot of machinery etc from EVERYWHERE.
Note that it imports a lot from South Korea and Japan, Taiwan etc as well as China.
Did you know that Vietnam's Q3 GDP grew 8.2%YoY and Q2 was 8%? It is one of the few countries in Asia where manufacturing share of GDP is rising even as Chinese imports flood the market. Why?
“In contrast to other countries that are stuck in political paralysis, Vietnam has moved very swiftly to secure lower tariffs and reform its economy to increase productivity and competitiveness,” @Trinhnomics , a senior economist at Natixis SA, said. “This has allowed Vietnam to emerge as a winner under Trump 2.0 despite high tariffs because it’s favored as a foreign direct investment destination for those wanting to diversify away from worsening US-China tensions.”
Look at manufacturing across Asia and what do you see? Its down for India, Malaysia, the Philippines, Thailand, Indonesia.
But not Vietnam. It's up. The fact of the matter is Vietnam faces a widening trade deficit with China but at the same time it has turned that into an overall trade surplus, which means that Vietnam value add has risen over time.
And you can see it clearly in its manufacturing share of GDP or global market share. Has been slowly steady climb.
This year, in 2025 manufacturing output surged 9.92% in the first nine months of 2025 from a year earlier, with around 77% of companies surveyed by the National Statistics Office saying export orders were higher or at the same level, a sign that US buyers are shrugging off the tariff hit for now.
What is Vietnam doing right? Well, first, the most important thing is that it wants manufacturing above all else. Vietnamese people need formal jobs and by prioritizing that, Vietnam is now focusing on the next leg of development, which is how to ADD MORE VALUE.
Blink and you will miss the biggest reform story of Asia. Vietnam literally redrew its map & made one of the biggest structural reforms in decades.
Rare earth is in the news again. Of course it is not rare, just that you gotta dig deep and then obvs process it. That entire process is polluting, costly and the output itself doesn't yield a lot.
That's how China has captured the market. It's willing to do polluting working and basically sells more not a lot. But having cornered that market, it also sees it as leverage, which it has used since 2010 (with Japan). The weaponization of supply chain is what we call it.
The free market economics of it makes sense for people to just leave it to China to do rare earth & then focus on the more market profitable business. Until, well, dun, dun dun.
So how should a firm or government view rare earth? Should you go and pay HIGHER price than what the Chinese rare earths are going for to then secure resilience of supply chain?
Most say, well, "Nah." That is a costly move because well, others will outcompete you with cheaper Chinese inputs while you go dig and refine your rare-earth magnets. Not an economically worthwhile endeavor.
But not everyone has taken that decision. Here is a story of a company that didn't: General Motors.
Here I summarize the great reporting of the WSJ Jon Emont and Christopher Otts.
As you know, we have known this issue for a long time & Japan knew about it since 2010. So the Japanese usually have about 1 year of this stockpile, just in case. Not the Americans.
The car industry is pretty dependent on rare-earth magnets. GM decided that Covid shocks, which left it with semiconductor shortage, that it should secure non-Chinese rare earth magnets.
This sort of decision takes years to bear fruit so it is one with risks. Why? Well, your competitors can buy cheaper Chinese rare earth while you are trying to get more expensive non-Chinese.
Here we go, as I'll go on TV soon with @JoumannaTV to discuss data, let's take a look at China September trade data that just came out.
September exports rose 8.3%YoY in USD and imports increased 7.4%YoY.
Year-to-date, exports grew 6.1% while imports declined -1.1%YoY.
By destination, China exports to the US fell -16.9% but to Asia rising rapidly.
Exports to India rose 12.9% and India deficit with China is accelerating, with imports not just intermediates for production but also final consumer goods.
Shipment to ASEAN rose 14.7% with fastest growth to Thailand and Vietnam (+22.5% and 22.3%, respectively). The sharp increase of shipment reflect supply chain diversification but also rising imports for domestic demand in ASEAN that also poses challenges to domestic industries.
Exports to the EU rose 8.2% with shipment to Germany increasing +10.5%.
Interestingly, China exports to Russia has fallen this year by -11.3% as Russia puts up curbs to some Chinese exports.
China trade surplus in September:
#1 EU 22.9
#2 USA 22.8bn
#3 ASEAN 17.2bn
#4 India 10.3bn
From winning the Trump trade war, India is now the US President’s biggest target. The Trump administration imposed a 25% tariff on India. To add insult to injury, Trump announced another 25% tariff, effective tomorrow, on the grounds that India imports crude oil from Russia.
Indian goods bound for the US will now face tariff rates similar to China’s if we include the Trump 1.0 tariffs, making any China+1 strategy in India less competitive for US markets, and relative to Southeast countries, which for the most part face tariff rates of about 20 per cent.
Will the additional 25% tariff stick? While Russia’s war with Ukraine isn’t going to end by Wednesday, the secondary Trump tariff is likely temporary. Therefore, the question is not whether India will be able to bring the 50% back down to at least 25%, but when.