[Viewpoint]Heeding signs in China

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[Viewpoint]Heeding signs in China

A few unusual signs are casting a shadow over the Chinese economy, and Korea cannot take these changes for granted because our economy is highly dependent on China’s. Obstacles include unstable prices, pressure to raise wages, danger of an economic bubble and a paralyzed transportation system across China due to heavy snow.
Moreover, there are rumors that the Chinese economy is expected to make a hard landing after the Beijing Olympics and to be affected by the aftermath of the sub-prime mortgage crisis in the United States. Chinese Premier Wen Jiabao even said that this year might be the most challenging ever for the Chinese economy.
However, the fate of the Chinese economy is more dependent on the management of the Chinese currency than the Olympics games or economic uncertainty in the United States.
Of course, it is common for a country’s economy to waver after hosting an international event, such as the Olympics. Korea and Japan saw their growth rates fall by half after hosting the Olympics. But the situation is different in the case of the 2008 Olympics in Beijing and the 2010 Expo in Shanghai.
The Olympics makes up only 3.7 percent and the Expo 4.9 percent of the total Chinese economy. The economic insecurity originating from the United States is not expected to be significant. On the surface, the Chinese economy seems to be heavily dependent on trade with foreign countries, as about 70 percent of the gross domestic product comes from foreign trade. However, 60 percent of the trade is commerce through companies with foreign investments, and the actual influence of international trade on the Chinese economy would be less than 30 percent.
Moreover, there is a good balance between trade partners, with 14 percent of trade taking place with the United States, 19.6 percent with Europe and 10.9 percent with Japan. Therefore, uncertainty in the U.S. economy alone is not enough to derail growth in China.
The rumor of crisis-level inflation is also not that threatening. It is unavoidable that wages rise with rapid growth. The minimum wage defined by law is still under $120 a month. Of course, small and midsized companies operating in China might suffer, but we should not ignore the fact that higher wages enhance personal income and lead to greater spending, which could boost China’s economy.
Considering that China’s energy dependency on foreign countries is below 10 percent, inflation caused by oil prices is also not a big concern.
Actually, the biggest cause of worry for the Chinese economy is the vicious cycle of increasing foreign currency reserves and the consequent currency expansion that leads to inflation. Since China joined the World Trade Organization in 2001, its foreign currency reserves have been growing rapidly. China held a reserve of $1.53 trillion at the end of 2007. The size of China’s reserve is 1.5 times of Korea’s GDP and has grown by $1.32 trillion in seven years. So far, Chinese authorities have issued monetary stabilization bonds to keep from issuing more currency. In spite of such efforts, the foreign currency reserve increased by $461.9 billion in 2007, including a trade surplus of $262.2 billion.
In order to respond to the increase in the foreign currency reserve by $400 billion annually, the Chinese authorities need to issue about $20 billion in new treasury bonds. The bond issues will be a serious burden to the economy. With too much cash in the market, the surplus will be concentrated in stocks and real estate, and participation by some foreign investors will heighten the danger of inflation in China. Now, Chinese authorities’ willingness to resolve inflation is put to the test. A high-ranking Chinese official who recently visited Korea expressed concerns about currency surpluses and showed interest in Korea’s precedent in controlling inflation.
China’s policy in the future is expected to focus on appropriate deflationary measures and surplus currency control. It is inevitable that Beijing revalues the yuan, gives less welcome to foreign investment, cuts off the inflow of speculative investment and expands the use of foreign currency holding. Some smaller Korean businesses in China are abandoning their operations due to these policy measures. The China Investment Corporation, a sovereign wealth fund, is concentrating $300 billion in investments abroad.
The possibility that the latest unusual signs signify an immediate crisis in the Chinese economy is small. Rather, the world cannot take its eyes off China because its economy now has such significance internationally. What counts more is the change in China’s policy. From now on, China is highly likely to pursue free movement of capital, about which it has long been skeptical. It is considered a necessary step to ease the pressure of inflation following the rapid expansion of foreign currency holdings. We should not be stirred by rumors of crisis. Instead, we should thoroughly calculate the losses and gains in our economy following the changing Chinese policy.

*The writer is a professor of economics at Seoul National University’s Graduate School of International Studies. Translation by the JoongAng Daily staff.

by Cheong Young-rok
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