BNY's Geoff Yu has highlighted that South Korea, Taiwan, and Japan have become key surplus providers to the United States as China's exports to America have declined [1]. According to the Bank of Korea (BoK), the combined trade surplus of Japan, South Korea, and Taiwan with the U.S. stood at $40 billion in January, with the rolling three-month average surplus reaching $30 billion [1]. However, the BoK has flagged significant risks of a reversal in these surpluses, warning that the current supply shock could be more severe than the disruptions experienced in 2022–2023 [1].
At a recent BoK meeting, Governor Rhee Chang-yong, whose term ends this week, cautioned that if the current shock materializes, there could be a substantial swing from sizeable surpluses to deficits, leading to a sharp reduction in capital outflows that have previously supported global markets [1]. Specifically, if the deficit for South Korea and its peers is even worse than in 2022, the maximum swing could be from a $40 billion combined surplus to more than $30 billion in combined deficits, representing a single-month drop of $70 billion in capital outflows, assuming full recycling [1]. On a three-month rolling basis, the combined swing could reach $150 billion, moving from a $30 billion positive average to a $20 billion deficit [1].
The article notes that the combined surplus drop for China, Taiwan, and South Korea for intervention purposes already exceeded $100 billion in March alone, suggesting that a $150 billion loss in recycling flow is not unrealistic [1]. These developments imply material risks for the South Korean won and broader APAC capital flows, with the potential for significant market disruptions if the scenario outlined by Governor Rhee comes to pass [1].
CONCLUSION
The Bank of Korea's warning signals heightened risks of a sharp reversal in trade surpluses for South Korea and its regional peers, potentially leading to significant capital outflows and market volatility. Market participants should closely monitor developments, as the scale of the projected swing could have far-reaching implications for the won and APAC financial stability.