Seoul hit as China bids to shore up economy

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Seoul hit as China bids to shore up economy

The Seoul main bourse opened on a positive note on Tuesday, largely due to the overnight increase in the U.S. stock market after Stanley Fischer, Vice Chairman of the Federal Reserve, hinted the U.S. central bank may further postpone its interest rate hike.

But the favorable sentiment turned around after the Chinese central bank announced it was devaluing its currency. The People’s Bank of China (PBOC) sharply depreciated the renminbi 1.86 percent to 6.2298 against the dollar, the lowest level in three years.

The move was considered to be a result of the Chinese government’s effort to boost its struggling economy by boosting exports.

Chinese exports last month tumbled 8.3 percent from a year ago, in sharp contrast to the 14.5 percent surge a year ago. It was the sharpest drop in four months.

Its producers’ price in July also fell to the lowest level in six years.

While in the first half of the year, China was able to defend its annual 7 percent growth, there have been growing doubts about whether it could do the same in the second half. China’s economy has been reporting annual growth in the 7 percent range since 2012.

Tuesday’s move pushed the Korean main stock market to fall below the 2,000 mark for the first time in five months. The drop wasn’t severe, as the benchmark Kospi closed 16.52 points, or 0.82 percent, lower than Monday’s close to 1,986.65.

The Korean won hit a three-year low as well as other major currencies in Asia.

“It’s excessive to say that China is getting ready for a currency war with their recent currency move, but it definitely had a negative impact on the Korean stock market,” said Kim Yong-goo, a Samsung Securities analyst.

Some market experts are already projecting this might not be the last move the Chinese government will make.

Some are speculating the Chinese central bank could further depreciate the yuan by 3 percent.

The devaluation of the renminbi comes as Korean exports have been heavily hit by the depreciated Japanese yen, which has weakened the price competitiveness of Korean goods in the global market.

While the weak yen continues to erode the footing of Korean goods in the global market, the depreciation of the Chinese currency could further affect Korean exports, which are heavily dependent on the world’s largest market. China accounts for a quarter, or 25.4 percent, of Korea’s overall exports. This is twice the size, at 12.3 percent, of goods shipped to the U.S.

But some experts warn against reading too much into the move by the Chinese government and the impact it might have on the Korean economy.

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