BNY's Geoff Yu highlights that South Korea, Taiwan and Japan have become key surplus providers to the U.S. as China’s exports to America declined. The Bank of Korea (BoK) warns the current supply shock could be more severe than 2022–2023, implying a potential swing from sizeable surpluses to deficits and a sharp reduction in capital outflows that previously supported global markets.

BoK flags deeper surplus reversal

"The sharp drop in exports from China to the U.S. (unadjusted for trans-shipments) has increased the share of surpluses generated by Japan, South Korea and Taiwan for the U.S. Against all trading partners, they stood at a combined $40bn in January, with the rolling three-month average surplus also hitting $30bn."

"The risk is that all of this could now move sharply into reverse. At the recent Bank of Korea (BoK) meeting, Governor Rhee Chang-yong, whose term ends this week, warned that the current shock would be even more severe than in 2022–2023. If this scenario is realized, the capital flow swing due to surpluses shifting into trade deficits across APAC would be material."

"Taking Governor Rhee at his word, if the deficit for South Korea and its peers is even worse than 2022, a maximum swing from $40bn in combined surpluses to more than $30bn in combined deficits would represent a single-month drop of $70bn in capital outflows (assuming full recycling). On a three-month rolling basis, the combined swing could reach $150bn (from a $30bn positive three-month average to -$20bn). Considering that the combined surplus drop for China, Taiwan and South Korea for intervention purposes already exceeded $100bn in March alone, a $150bn loss in recycling flow is not unrealistic."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)