An ominous slowdown

The China risk may be turning into a crisis at hand. The slowdown of the Chinese economy, which has done so much in recent years to fuel the world economy, has hit Korea, which heavily depends on China for exports. The National Bureau of Statistics of China announced that China’s gross domestic product (GDP) growth rate for the third quarter of this year dipped to 7.3 percent, which actually was higher than expected. But even though analysts had forecast growth in the 7.2 percent range, it nevertheless is the lowest growth since the first quarter of 2009. Market observers now have pessimistic predictions that China can hardly achieve its original goal of 7.5 percent GDP growth this year.

The slowdown of our largest trading partner has begun to adversely affect the struggling Korean economy through a drastic reduction of its exports to China. Our exports to China have continued to register negative growth since May. China’s slowdown has set off alarm bells at a myriad of Korean companies that garnered decent profits by selling raw materials and parts to once-thriving Chinese companies.

China has been pressing ahead with policies to transform its economic structure, largely based on manufacturing and exports, into one based on domestic consumption and services, even at a cost of slower growth. That means Korean companies’ exports to China will decrease unless they stop relying on exports of intermediary goods to that market. Although Korea’s big corporations are steadily changing their export strategies to meet structural changes in China, a number of small and midsize companies are feeling far more vulnerable.

There are also growing concerns about the possibility of deflation across the world, partly originating from China’ economic slowdown. An ominous combination of slowdown and deflation could trigger a worldwide depression. If China’s slowdown gets worse, the Korean economy will experience serious trouble finding a breakthrough growth engine for the future.

If our exports cannot be revived and domestic consumption remains lackluster, we can hardly expect an economic recovery. If the government wants to avoid a catastrophic situation, it must first augment its export competitiveness by increasing exports of differentiated products and services tailored to China’s domestic market, while adroitly shifting our industrial structure to the one based on domestic consumption and services. We cannot give up exports or stop building an industrial structure focused on domestic consumption.

JoongAng Ilbo, Oct. 23, Page 34