KRW: Mixed blessing in CNY devaluation

Nominal exports growth continued to weaken, contracting 4.9% yoy over Jan-July. In real terms, exports plunged into negative territory, declining 0.9% yoy in 2Q15, the first real exports contraction since 3Q09. Export recovery will ultimately depend on the global outlook, especially as sluggish demand from China, Europe and Japan continue to be a drag, limiting a stronger export upswing. From a macroeconomic perspective, recent CNY devaluation will likely be a mixed blessing for Korea. 

On one hand, Korea, with 25% of its export going to China, may suffer from a double whammy of losing competitiveness in high-end export products vis-à-vis Japan and for lower added value exports vis-à-vis China if China ends up substituting with its own semiconductors, displays and petrochemical products. That said, this may possibly be offset by 1) further depreciation in Korean won and 2) Being a part of the global supply chain, if CNY devaluation boosts the price competitiveness of China exports, China may in turn demand more imports of Korea-made intermediate goods.