[EDITORIALS]More ‘China shocks’ are likelyThe stock markets have recovered from last week’s “China shock,” and the won has stopped gaining on the dollar. It is fortunate that the financial market is regaining stability.
The market has overreacted to the news that China would take steps to cool down its hot economy. If China sees a drastic decline in its growth rate, the ripple effect on the Korean economy would be enormous. But because most experts saw the Chinese government’s plan as a way to prevent future economic problems, the reaction of the domestic financial market was excessive.
The real problems still lie ahead. As the Chinese government has shown that it will not idly watch its economy overheat, it is anticipated that a series of stabilization policies will be presented in some intervals.
We can expect that China will try to cut down on excessive investments and reduce imports from overseas. This would affect the Korean economy in a big way. The government must be prepared to minimize such an effect by accurately analyzing the situation and reassuring the market ahead of time, so that investors won’t panic whenever China announces such measures.
At the same time, even if China’s economy makes a soft landing, its effect on the Korean economy still will be enormous. A soft landing of the Chinese economy means that the growth rate will decrease gradually. According to one analysis, the growth rate of the Korean economy will decrease 0.25 percent when that of China drops 1 percent. Even a small downturn in the Chinese economy will be felt in Korea.
The dependency of the Korean economy on the Chinese is already too high. As we can no longer expect the Chinese economy maintain more than a 9 percent annual growth rate as before, the Korean government and businesses must prepare for the eventuality that China’s growth is likely to drop to under 8 percent.
In the short term, such news won’t shake up the Korean economy irreparably. However, it is time to hurry preparations and study the effect of the Chinese economy on the structure of the Korean economy in the longer term.
Overreacting to a problem is something we should avoid doing, but thinking that the China shock will be over with this last one is dangerous.