The China conundrumEconomic data from China, the world’s second-largest economy, has been disappointing all year. Its industrial output, exports, consumer confidence and fixed asset investment have all performed way below expectations. Moreover, trade, at which China has excelled in the last few decades, is now feeling the pinch due to sluggish consumption in Europe inspired by fiscal and debt woes that are riddling the region. Making matters worse, Beijing, which has already proved itself economically savvy, missed the opportunity to make pre-emptive policy moves as it got caught up in its own political struggles ahead of an expected leadership change later this year.
However, there is no need to see these events as portending disaster, even if the country’s GDP looks unlikely to meet its growth target of 7.5 percent this year. The cash-rich government can afford to increase its spending and the central bank is well armed with ways of cutting the base interest rate and other measures to ease liquidity and stimulate the economy.
But fears of a slowdown in the industrial and consumer powerhouse could send shock waves through Korea’s export-dependent economy. China ranks as our biggest export market and accounted for 24.1 percent of total outbound shipments last year. Amid signs of a slowdown in China, total exports dropped about 3 percent on-year in the first quarter of this year. Although exports to China still grew 2.6 percent, this was weaker than usual and took its toll on many Korean manufacturers.
Meanwhile, Korean, Chinese and Japanese manufacturers of steel and petrochemicals are cutting each other’s throats in a series of price wars as Chinese companies continue to make huge investments to ramp up their businesses. Korea’s business sentiment index slumped to 98.3 recently, showing a negative outlook largely due to the risks posed by China.
Korea has enjoyed the fruits of China’s momentous expansion over the last two decades, but the party now may be over and Seoul must guard itself against growing risks. The Chinese economy can no longer be expected to grow at a galloping pace, and it can no longer be safely seen as just a cheap labor base and an immense consumer market. Local traders should instead start eyeing new opportunities in emerging markets in the Middle East, Latin America and Africa. At the same time, efforts to sign a free trade pact with China should be accelerated. The government must map out contingencies plans so Korea can continue to thrive as China makes either a hard or soft landing.