Let me start by expressing my deep sadness and sending my condolences for the disaster facing Japan.
Since 2007 China has been Japan’s largest trading partner. As such there is likely to be some level of economic impact. About 8% of China’s exports end up in Japan (China’s third largest export market), and about 12% of China’s imports come from Japan (China’s largest source of imports). In addition, about 7% of China’s FDI comes from Japan. Let’s look at each of these issues (exports and imports) in more detail.
The pertinent question is whether the disaster will have a negative impact on Chinese exports to Japan. If history is anything to go by, Chinese exports might in fact increase. After the Kobe earthquake in January 1995 China’s exports to Japan increased by 65% yoy in 1Q95 (from 39% yoy in 4Q09). Exports increased to substitute for the loss of Japan’s production, and included goods such as metals, construction materials and prepared food.
Although the worst hit Japanese areas are not as industrially intensive as those hit in the 1995 earthquake, rolling power outages across the country to account for loss of electricity production (due to the nuclear power plant explosion) will have an impact on industrial production across the board.
The same question can be asked of imports. Will China’s imports from Japan suffer as a consequence of the current disaster? Logically, I would assume they will in the short-term. In 1995 China’s imports of Japanese vehicles, for example, crashed 77% yoy in 1H95 from an increase of 14% yoy the previous half.
As I mentioned, the current quake/tsunami devastated areas are less industrialized than those hit in 1995. This might mean that the impact on imports could be smaller this time, nonetheless the impact on the Chinese economy might be bigger this time around. Why? China has become an assembly line for some major Japanese multinational companies in the past decade, accounting for the downstream production for many multi-national firms. As such, output disruption in the Japanese upstream (e.g. chips) presents a potential risk for Chinese production. Toshiba, for example, has NAND facilities in the damaged areas; they provide chips to the likes of Apple. However, while the impact could be felt for a number of quarters while plants are repaired / rebuilt, I believe the impact will be muted, as Chinese producers seek substitutes from other sources such as Korea and Taiwan.
Over the past few days grain prices have come down from recent highs. One driver is Japan. I would have thought that damage to Japanese inventory in the ports would have provided upside to grain prices. However, I’ve heard others argue that port disruption is causing concern that US exporters will be left with inventory, and as such prices of grains have softened. Clearly my initial thinking was incorrect as prices have gone down in the short-term, but does the argument for Japan impacting prices negative make sense? Let me know what you think.