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
Business & Investment Opportunities
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