GBP/JPY: Tread Lightly

GBPJPY, Tread Lightly, China, Shenzhen, Fundamental Analysis, fx trader, forex

13 Jan 2016

In early June 2015 China’s equity markets were surfing the crest of the wave. To put the rally in perspective, from June 2014 until June 2015 China’s combined equity market capitalization increased by £4.45 trillion ($6.5 trillion USD)1. The Shanghai gained 60% and the Shenzhen over 100% by mid-year2. At that time new issues were being listed and Chinese investors had leveraged £238 billion ($348 billion USD) with price/earnings ratios exceeding those of the ‘internet bubble’.  As it often happens with bubbles, the first warning signs of a ‘sea change’ were being ignored. For instance, data indicated an 18% decline in imports to the mainland.

To get a glimpse of the Asia-Pacific trading network, note that in spite of bad political relations, China is Japan’s primary bilateral trade partner. Excluding energy importing trade, South Korea is Japan’s second largest bilateral trade market. China is South Korea’s primary bilateral trade partner, followed by Japan. China is Australia’s largest bilateral trade partner, followed by Japan and then South Korea. Other regional economies, advanced or emerging, follow suit: primarily dependent on China; secondarily dependent on China’s primary trade network.

On the other hand, the UK’s primary bilateral trade market is within the European Union. The UK’s bilateral trade with China is by no means insignificant accounting for about 4.00% of exports and 8.8% of imports. However, a significant contraction in China would not have nearly the same impact as it would have on Japan.  As a single entity, in 2014 the EU3 recorded a trade deficit with China: importing goods worth €302 billion (£225 billion, $326 billion) and exporting €164.8 billion (£122 billion, $178 billion) in goods; importing services worth €22.6 billion (£16.86 billion, $24.41 billion) and exporting services worth €31.7 (£23.66 billion, $34.24). Still, as a ‘trade portfolio’, the EU’s trade with China is diversified by EU member as well EU member products or services.

The point of the matter is that European Union economies either as a whole or individually, like the UK, will be impacted by declining PRC growth, but not nearly as much as the Asia-Pacific economies. Although the Asia-Pacific contraction will impact the Japanese economy, the Yen is still considered a safe haven asset. This is undoubtedly a source of frustration for the BOJ. Further, the policy tools at hand seem ineffective.  The BOJ might simple have to wait until the restructuring of the Chinese economy is complete.

GBP/JPY Price Event Chart