Macro Horizons China Flexes its Muscles in Deals with Russia, South Korea

• published: 11 Nov 2014
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Macro Horizons covers the main macroeconomic and policy news events affecting foreign-exchange, fixed income and equity markets around the world, as selected by editors in New York, London and Hong Kong. WRAP: News developments Monday that are ostensibly domestic or bilateral in nature speak more powerfully to some of the broader geopolitical challenges facing the world. A South Korea-China trade pact will have some impact on those two countries’ sagging economies but the deal is just as important in terms of the symbolic message Beijing is sending to the U.S. and 10 other countries currently negotiating a multilateral Asia-Pacific trade deal that excludes China. The same goes for a China-Russia gas deal. In both it appears that China left some money on the table in return for the ability to express its importance as an economic powerhouse. The deal with Russia also matters on the geopolitical front because it protects Moscow at a particularly vulnerable moment in its tense relationship with the West. The agreement helped buoy the ruble and so allowed the Russian central bank to abandon its managed exchange rate regime without causing the currency to crash. RUSSIA: The Russian central bank said it would let the ruble float freely. It also forecast growth expectations cut to 0.3% for this year from 0.4% previously and said it expects inflation to exceed 8% against the bank’s target of 4%. It also said it sees net capital outflow for the year to reach $128 billion from $100 billion previously. The ruble, despite the removal of central bank support, held up, mostly because of news of a second deal with China for Russia to provide the giant Asian economy with gas. Russia’s central bank, which was losing reserves at a rapid rate due to interventions to keep the ruble inside its proscribed trading corridor, is acknowledged the country’s tough reality. The economy will barely grow this year in inflation-adjusted terms. Inflation is racing away with chronic ruble devaluations. And sanctions, a falling oil price and political unease have triggered a major flight of capital from the country. What’s more, with no sign of a reduction of tensions between Russia and Ukraine, economic conditions are unlikely to get better any time soon. (AM) ASIA: South Korea and China agreed on a free trade pact just before Beijing is to host a summit meeting of the Asia Pacific Economic Cooperation forum that includes U.S. President Barack Obama. The agreement will cut Chinese tariffs on South Korean electronics products and assure protections to South Korean investors in China. For China, the deal opens up opportunities for its agricultural exporters. Meanwhile, President Obama and others are pushing to make progress on the sweeping Trans-Pacific Partnership trade deal, which incorporate 11 countries within the Pacific Rim. China is not party to those talks. It looks as if South Korea, whose electronics producers have been struggling with tougher competition from China, Taiwan and Japan, got more from its trade deal than did China. But for Beijing, this could be more of a geopolitical ploy than anything else, a way to demonstrate that it has clout while the U.S. , Japan and others push forward with the TPP proposal. The same goes for China’s new gas deal with Russia. The message is that China matters and won’t play by the rules set by the U.S. That both deals were struck ahead of the APEC meeting is important and puts the pressure on Mr. Obama, weakened by last week’s mid-term election results, to come up with something constructive. (MC) ITALY: September industrial output fell 0.9% on the month and 2.9% on the year against expected declines of 0.2% and 0.8% respectively.