Changes for China

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Changes for China

China’s economy is facing a turning point. On June 19, the People’s Bank of China issued a statement saying the time is ripe to proceed with a reform of the yuan exchange rate regime given the strong economic rebound at home and the gradual recovery abroad.

In other words, it would permit a gradual appreciation of the yuan. But it would be a misunderstanding if one interprets such a move as giving in to pressure from the global community. Rather, China is eyeing the positive aspects of the yuan’s appreciation because its leaders believe it is good for boosting domestic consumption and enhancing quality of life, while avoiding inflation and a property bubble.

Korea’s biggest trading partner and destination for investment, China has become a country wielding the biggest influence on the Korean economy. With a possibility of yuan flexibility rising, the Korean won’s exchange rate to the U.S. dollar plummeted to 1,171, dropping by 30 won overnight.

If such a situation continues, Korea’s exports to China may increase in the short term, but this could also pose problems for us as the won will also suffer pressure to appreciate from foreign countries. Most urgent for us is strengthening the immunity of our economy from external variables, while expecting minor exchange fluctuations of 3 percent for a while.

Another sign of China’s rapid change is a wave of strikes and the domino of pay hikes, which heralds the end of the low wage age. That’s a pain China must suffer in the throes of growth. The Taiwan-based electronics manufacturer Foxconn Technology Group and Honda Motors presented plans for pay increases for their Chinese workers after suffering from strikes. Foxconn increased new workers’ wages by a whopping 65 percent, while Honda upped wages by 25 percent. Korea’s SungWoo Hitech, an automobile parts manufacturer, also had to raise wages by 15 percent at its local factories.

As pay rises, China’s export competitiveness cannot help but go down. Foreign companies in China are now rushing to move their local factories to Southeast Asia. China’s Communist Party is reacting in a surprising way as it continues to stress the importance of boosting the domestic market. The country’s government media ran one editorial endorsing workers’ strikes by saying that China’s widening income disparity must be properly addressed. With local leaders siding with the central government, the minimum wage of major economic regions rose by 20 percent, which will eventually pose a cost burden to over 20,000 Korean companies in China.

However, we cannot give up on China’s market. We enjoy a geographical advantage with our neighboring country, and we should make aggressive changes to survive in the “market of the world.” We urgently need a drastic restructuring of business to turn the fluctuating Chinese economy into a new opportunity.

We have successfully weathered tough times, mired in a foreign reserves crisis or labor disputes. The only thing left is our wise judgement based on our painful experience.
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