Brace for China’s belt-tightening

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Brace for China’s belt-tightening

China’s 10.3 percent real growth rate last year was its first double-digit return in three years. The consumer price index also hit 3.3 percent, exceeding the government’s original goal of 3 percent. As China’s overheated economy translates into a source of concern inviting austerity measures, economic experts are voicing concern about China’s hot economy, citing a strong need for the government to adjust its growth rates.

As a result, world stock markets plunged and the prices of major commodities, including crude oil, plummeted, reflecting investors’ expectations that the Chinese government will raise interest rates before the start of the Lunar New Year holiday to ease its overheated economy at the cost of economic growth. Its decisions have consequences for the world.

China’s tight-money policy has been singled out as one of the three major factors involved in Korea’s economic growth, together with the financial crisis in Europe and deflation in the United States. If China opts to tighten its fiscal policy, it will employ such measures as raising the benchmark rates, reducing bank loans and increasing banks’ reserve ratios. The Chinese government is also likely to quickly appreciate the value of the yuan to control its rampaging inflation.

But the problem is that Korea is most vulnerable to such measures, as it relies on China for more than 30 percent of its exports and recorded a trade surplus of $45.3 billion last year alone. The sharp rises in wages and raw materials prices in China are also exerting a negative impact on our economy, deepening worries about “Chinaflation.”

The Korean economy is inseparable from the Chinese economy. As China’s economic influence grows, it is imperative that we diversify our overseas export markets to replace the Chinese market, which is likely to dwindle for the time being. Also, our government should adjust its macro-economic policies involving money rates and exchange rates to reflect China’s policy changes as flexibly as possible.

Over the long haul, Korea should brace for China’s tidal change from its emergence as a G-2 nation to the unavoidable adjustment of economic policies. We could make an economic leap thanks to the growth of the Chinese economy. But China is shifting its economic focus from rapid expansion to finding solutions for the adverse effects caused by its rapid ascent. We need to draw up a new strategy for our economy to keep abreast of the changes in China.
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