Can Seoul manage the China risk?

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Can Seoul manage the China risk?

The free fall in Chinese stocks has renewed as investors pack out seeking greater and safer returns in advanced markets following China’s devaluation and concerns of a faster-than-expected slowdown in the world’s second-largest economy. The main Shanghai index fell more than 5 percent Tuesday and recovered the following day. The sell-off spilled over to neighboring countries: The Seoul bourse slipped below 1,940 for the first time in six months, and the technology-laden Kosdaq lost more than 7 percent in just two days.

Moreover, the wave of volatility in Chinese stocks is likely to continue. Chinese shares have been sliding fast from their peak above 5,100 in mid-June. The downward spiral was stopped by all-out intervention from authorities, but it was again triggered as the series of interventions backfired. Government actions can only aggravate insecurity if they lose confidence from investors.

The stock woes are now feared to exacerbate the Chinese economy. The economy is expected to end the year at its worst performance in 25 years by growing 6.8 percent, below the government target of above 7 percent. A sharp decline in car sales and power output suggests sluggishness in domestic consumption and industrial activity. If domestic demand is further dampened by a stock crash, the impact could affect other parts of the world.

Currencies of emerging economies have depreciated sharply since the U.S. declared it could raise interest rates this year. Currencies of Malaysia and Indonesia are at their lowest since the Asian currency crisis in 1997. Brazil is set for a recession, expected to post negative growth next year.

The Korean economy would inevitably receive a heavy blow. China accounts for 25 percent of Korea’s exports and 40 percent for the country’s investment in overseas stocks. Oxford Economics predicted that if the Chinese yuan falls 10 percent against the U.S. dollar, Korea’s economic growth could be pared by 0.9 percentage point next year. State-run Korea Development Institute predicted that Korea’s economic growth could be slowed by 0.17 percentage point if China’s growth rate slows by one percentage point.

The Korean economy is already doing poorly. Crisis may not be avoided if external factors like the U.S. rate hike and Chinese instabilities are added. Authorities must try their best to fend off dangers keeping close watch on the foreign exchange market and accelerating structural reforms like in the labor sector. JoongAng Ilbo, Aug. 20, Page 30

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