A break for China…
/I will get back to hospitality, but I am all hospitality-ied out , and I thought I would look at smaller issues that are also important. An article in the WSJ last week, which I can’t find, piqued my interest. I can’t remember what the whole column was about, but the author was talking about correlations between China and the rest of the world and said it had been increasing.
THE TRENDS ARE SIMILAR, BUT NOT TOO SIMILAR… SOURCE: YAHOO FINANCE, VIETECON.COM
Of course, many publicly-traded companies around the world depend on China, and I am pretty sure that Vietnam as a country depends a lot on China, given its historic ties (both positive and negative) and because of trade, tourism and investment that flows between the two countries. So I thought I would look at the correlation of the stock markets to see if I could see something.
Spoiler: I did, but it isn’t too significant. First, I just looked at the chart of the Vietnamese index and the Shanghai index since 2014. As you can see to the right, there are times when they seem to track each other quite closely, but not too much.
I then just did a quick test, how often do the indexes trend in the same direction, positive or negative. Surprisingly, about 55% of the time, they trade the same (meaning the Chinese index goes up when the Shanghai index does or vice versa).
THE PATTERN IS PRETTY MINOR, AT LEAST BY MY EYES. SOURCE: VIETECON.COM
I just did a quick check to see if there has been a big difference by year and there was little difference except in 2014. In 2018, 54% of the time, the indices moved in the same direction. In 2017, it was 55%, then 59% in 2016 and 56% in 2015. The big change was in 2014, when they moved together only 48% of the time.
I also did a regression on these trends, and it was found to be significant (the p-value was below 1%), but the effect is small (the adjusted R-squared was .005. Basically, I took a dummy value, with 1 being positive and 0 as negative. If China is positive, then you can put it in this formula, Vietnam = 0.51 + 0.08 x 1 = 0.59. If China is negative, then Vietnam = 0.51 + 0.08 x 0 = 0.51. If China is positive, then the expected value of the Vietnamese index performance is positive about 59% of the time (if I am reading this correctly, and I am not sure that I am entirely). And if China is negative, then there is about a 51% chance that Vietnam will be positive.
I also did a regression of the change in the index values as well and found a similar story. The p value again was significant (well below 1%), so the performance of the Chinese index did explain the performance of the Vietnam index, but only with an adjusted R-squared of 0.03.
Overall it appears that there is some movement together, but it isn’t as great as I would think. The actual correlation between the change in each index is less than 0.2, so positive but not massive and basically in line with what the regression says. (Can you tell that I am not always sure of my statistical acumen?)
The fact that correlation is so low is kind of surprising to me. But maybe the ties between the two countries aren’t as great as I thought they were. If we look at exports/imports, the US is actually the largest destination of Vietnamese exports (in 2016) at 21% compared to 13% to China. Imports are different, with Chinese imports making up 31% of the total (again from 2016). The figures were similar in 2017.
And FDI shows similar trends - there are countries more important than China. According to the Vietnamese Ministry of Planning and Investment Hong Kong and China ranked 4th and 5th, but even combined were well behind the first two (Japan and Korea) and just a bit more than #3 (Singapore). This might change over time if the Chinese economy slows and/or the trade war with the US continues. But as of now, investment flows from China are much less than Japan and South Korea.
In conclusion, correlation between China and Vietnam may not be as strong as people assume.