[Viewpoint]Shockwaves from China are a threat

The Chinese government recently announced a belt-tightening policy which includes increases in both interest rates and the rate of payment reserves, as well permitting the Chinese yuan to fluctuate more on the exchange rate market.
China has taken measures since last year to cool down its skyrocketing stock prices and overheated economy. It has also responded to international pressure for a revaluation of the Chinese yuan.
Since China is South Korea’s main export market, and the economic reliance between the two countries keeps increasing, some have expressed concerns about the effects the new policies might have on Korea’s financial markets and economy.
If the Chinese stock market plummets, the prices in the world’s stock markets, as well as in Asia and Korea, will also collapse in a chain reaction.
If China suddenly decides to revalue the yuan, there is high possibility that Korea will be pressed to revalue the Korean won.
However, the possibility that China’s belt-tightening policy will negatively effect the Korean economy is not high.
China took its recent measures while the country’s stock market and the economy were in good condition.
For that reason, the measures may cause a short period of instability in the financial market. And, for a slightly longer period of time, it could increase the possibility of a soft landing for the Chinese economy.
If the belt-tightening policies cause investments in China to decline sharply, Korea’s exports to China, which consist mainly of machine tools and chemical products, could also be hurt.
As of now, however, it seems very unlikely that the Chinese economy will contract.
The Chinese measures will probably work positively in the world economy and international financial markets.
By showing that China is willing to take such a move and listen to global pressure, the measures reduce the possibility that China’s situation will cause a crisis in the international market.
Secondly, the Chinese measures were anticipated to a certain degree and they weren’t as strong as expected.
The Chinese authorities had also hinted at the possibility of an increase in interest rates, so people weren’t surprised.
A reasonable economic policy made by subjects who gather the necessary information can have a predictable, if limited, effect.
In that vein, it is difficult to expect that the lower-than-anticipated increase of 0.2 percent in interest rates will bring a significant result, because the interest rate change is much less than the rate of economic growth. The range of fluctuation in the exchange rate for the yuan has been too narrow in the recent past, so the Chinese government had no room to intervene.
This year, however, the range of exchange rate fluctuation was 0.05 percent on average per day, far narrower than past fluctuation range of 0.3 percent. The highest revaluation rate was only 0.2 percent.
The condition of Korea’s economy has been relatively stable, but there has been enough liquidity in the international financial market to absorb a modest-sized economic shock.
When Chinese Premier Wen Jiabao announced a belt-tightening policy in April 2004, the share prices in most countries in the world plummeted.
The ripple effect caused the Korean economy to suffer a sharp decline, an example of the Chinese power to shock markets.
In 2004, however, the Korean economy was in bad shape because of a lack of consumption on one hand, which was caused by large- scale insolvencies of credit card holders, and also because of the unstable psychology of major economic players.
Korea’s economy is much more stable now. There is a rising trend of domestic consumption and the consumer’s psychology is improving, although the speed of economic recovery is slow.
After China’s belt-tightening announcement, stock markets in Asian countries, including China, remained stable and continued to grow.
Of course, we cannot expect that the present trend of stable growth will continue without interruption.
There is a possibility that China will announce stronger measures, such as an additional interest rate increase or revaluation of the yuan.
If they coincidentally bring about a sudden drop of stock prices due to a contraction in China’s economy, it could seriously burden Korea’s economy.
It is time for Korea to strengthen its financial market.
It must be scrupulously examined to determine the possible side effects of an overheated stock market and expanded bank loans to small- and medium-sized companies.
In addition, an effort should be made to stabilize the interest rates of short-term loans, which are getting unstable.
At the same time, we must make direct as well as indirect efforts to shed anxieties over pressure from the outside to revalue the Korean won.

*The writer is a researcher with the LG Economic Research Institute. Translation by the JoongAng Daily staff.

by Shin Min-young