Nov 8, 2012

South Korea - South Korea braces for China slowdown

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A rising China has been a boon for the Korean economy as its top export market, a major manufacturing base and rich source of investment, tourism and cheap products, despite the countries’ growing competition in the world markets.

Their ever-deepening ties are about to take a fresh turn as the world’s second-largest economy shifts toward domestic consumption, wealth distribution and quality growth under Xi Jinping and others in the new generation of leaders.

China’s Communist Party kicks off its once-in-a-decade leadership transition on Thursday. Xi will take its helm as new general secretary before being sworn in as president in March. Li Keqiang is next in line to become prime minister charged with overseeing the economy.

Its growth strategy dependent on exports and cheap labor faces a big challenge as the US and European markets remain stagnant and Western countries ratchet up pressure against its skewed trade and currency policies.

Amid signs of slowing growth, the leaders are also confronting domestic grievances on widening inequality and calls for political and economic reforms.

Analysts say Korean companies will have to cope with the changes by thinning out its reliance on China, diversifying their export destinations and revamping their approach in regards to the Chinese market.

“Continued heavy dependence on China as an export market may hurt the Korean economy when China’s economy readjusts in response to those problems,” said Kim Yoon-gee, an economist at Daishin Economic Research Institute in Seoul.

China’s economic woes
“Rather than raising its stake in China, Korea should diversify its export market portfolio while keeping up cooperation with China where it must. China will grow into a major power regardless, and we will continue to concentrate on exports, and supply raw and subsidiary materials to them.”

While China’s “state capitalism” has been much touted for its productivity and efficiency, it also left ever-simmering social fragmentation, income disparity and bureaucratic corruption.

Xi is known for his pragmatic creed and has reportedly stressed that power should be granted to the people. Aided by Li and Wang Qishan, speculated to become the next economy minister, he will likely put forward balanced development in terms of regions, income groups and industries.

One of his most challenging tasks is to follow through with the 12th five-year plan for national economic and social development, unveiled last year. The roadmap covers issues ranging from domestic trade to the financial industry to renewable energy, aiming for “major breakthroughs” in economic restructuring and “stable and relatively fast economic growth”.

The test-bed for the up-and-coming leader’s policy may be far-reaching income distribution measures to be unveiled by year-end, including a hike in minimum wages and a cap on salaries for public servants and employees of state-run enterprises.

“The five-year package shows how China will operate its economy over the next five years in terms of the people’s livelihoods, quality growth, domestic consumption and upgrading industrial structure,” an official at Seoul’s Foreign Ministry told reporters Tuesday on customary condition of anonymity.

“The success of the Xi government will be judged on how well he executes the existing project rather than what kind of new policy he introduces.”

Between July and September, the Chinese economy saw its growth rate slow for the seventh straight quarter to 7.4 per cent. Exports fell as investment and consumption stagnated.

Adding to headwinds are looming trade and currency disputes between Beijing and Washington. The standoff in part reflects the rich world’s growing discontent over widening trade deficits, China’s rapid buildup of foreign exchange reserves, currency intervention and massive incentives for its manufacturers.

Despite the low probability for a hard landing, Beijing may also face limited leeway for economic maneuvering, weary of possible inflation driven by increasing internal and external liquidity, according to Lee Chi-hoon, an analyst at the Korea Center for International Finance in Seoul.

“China may rebound in the last quarter as stimulus measures gradually bear fruit. But the pace will likely be slow because the recovery engine is not very powerful,” he said in a research note.

China will continue to play a crucial part for Korea’s struggling recovery. But despite China’s projected rebound there’s a possibility that Korean economy’s paralleled recovery will be weaker than in the past, he added.

The Korean economy expanded 0.2 per cent on-quarter between July and September, its slowest clip in nearly three years, stoking concerns that it may be nearing a low-growth era.

Bilateral ties
Europe’s festering debt crisis takes a toll on Korea’s exports, which take up about half of the nation’s gross domestic product. Domestic consumption remains listless amid mushrooming household debt and delays in corporate investment.

The local currency’s sharp appreciation is fueling worries for exporters. The won reached a 13-month high of 1,090 against the greenback on October 31, supposedly prompting the government to intervene for at least two days last week.

China is Korea’s biggest trade partner, taking up more than a quarter of the entire outbound shipments, while Korea is China’s third largest.

Bilateral trade volume totalled $220 billion last year, a 35-fold increase since in 1992 when the two countries established diplomatic relations.

It is also Korea’s second-largest investment destination after the US, surpassing $50 billion in 2011, official data shows.

“China has had a substantial, positive impact on the Korean economy. Korea is one of the biggest beneficiaries of China’s economic emergence, alongside Taiwan,” said Om Jung-myung, a senior researcher at Samsung Economic Research Institute in Seoul.

In the long term, China’s new direction could provide new chances for Korea as the market expands and more customers come along, he said.

“But given that Korea had viewed China as a manufacturing base rather than market opportunities, it will create a win-win situation only if Korea takes on structural changes in its approach to the Chinese market,” he added.

With trade remaining the bellwether for the two emerging economies, Korea and China have been pushing for a free trade agreement.

The two countries consider duty-slashing deals as a catalyst for trade and foreign investment in the face of withering consumer spending and government budget.

Last week, officials from both sides concluded their fourth meeting since they announced the launch of negotiations in May.

The process appears to have been quickened by the FTA between Korea and the US that came into force in March. If effectuated, the Korea-China deal would enable some 25,000 Korean firms in China to cater to the local market instead of exporting Chinese-made goods.

Meanwhile, China plans to begin talks to create a free-trade bloc with 16 Asia-Pacific countries, Korea’s Trade Minister Bark Tae-ho said Monday in Geneva.

The Regional Comprehensive Economic Partnership, to be formally introduced at the Asean summit in Phnom Penh later this month, aims to lower trade barriers across the region by the end of 2015. Its members are the 10-nation Asean and Korea, China, India, Japan, Australia and New Zealand, representing 28 per cent of the world’s GDP.

The initiative was based on an envisioned trilateral pact between Korea, China and Japan and scaled up with the support of the Southeast Asian club, Bark said.

The new community is also seen as a response to the Washington-led Trans-Pacific Partnership, an 11-nation league that includes Korea and Japan but excludes China.

“China’s position on this economic integration in East Asia was pushed by the TPP,” Bark said during a lecture in the Swiss city.

“In the past, China didn’t want to have Asean plus six, they only wanted plus three. Japan preferred Asean plus six. China preferred anything without the United States. I don’t know how much they hope to get but they want to do it because of the TPP.”

Seoul has separate FTAs with 44 other partners including the European Union, Asean, India and Chile.

China has clinched similar pacts with Asean, Australia, New Zealand, Hong Kong and Macau, Taiwan and Chile since the late 1990s.

Shin Hyon-hee

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