Between panic and opportunityChina, the second-largest economy in the world, is amply showing its importance to the world. Its epic stock crash unsettled equity markets around the globe and hit emerging currencies with particular force. The Shanghai composite index, which hovered around 2,000 in June 2014, gained 150 percent of its value by the time it peaks on June 12 at 5,166.35. But its course downward was even more dramatically steep. Despite various stimulus and stabilization measures, the index lost 38 percent of its value as of Monday. Call it instability with Chinese characteristics. It’s not over by a long shot.
The Chinese economy has been showing worrisome signs, but they were not so dismal as to trigger such a mega stampede from the markets over the last two months. China’s Caixin General Manufacturing PMI fell to 47.10 points in August from 47.80 in July, the lowest industrial activity since March 2009. A reading above 50 suggests a growing economy; below 50 signifies a contraction. The index has been below 50 since March. It stood at 49.40 in June when the main stock index hit its peak. Last month, China’s exports and imports dropped 8.9 percent and 8.6 percent respectively from a year ago. But a slump in a month’s trade data shouldn’t have prompted investors to dump Chinese shares. Steel output and automobile and smartphone sales fell sharply. Again it was too early to conclude China’s economy was in danger.
But the faster-than-expected slowdown of the industrial powerhouse was much hyped in the outside world. Global stocks tumbled and currencies of emerging economies crashed. The Chinese sneeze instantly spread as a global-wide case of the flu. Some already fear fatal consequences, pointing to signs of Chinese asset bubbles starting to burst. The hoopla mostly came from Western experts and media. At home, the perspective is somewhat different.
After decades of uninterrupted and fast growth, China is undergoing an inevitable correction. The biggest burden to the economy has been overcapacity as the result of an economy that grew more than 8 percent on average from 2003 to 2013. From the beginning of his administration, President Xi Jinping made it clear that the government will realign and balance the export-reliant economy to be more oriented towards domestic demand and market forces. He promised steady but not so fast growth. Past governments were obsessive about baoba - maintaining a growth rate of 8 percent - to maintain the employment rate. When a gross domestic product driven almost entirely by manufacturing and exports grew 1 percent, an additional 800,000 jobs were created. To supply enough jobs for seven million college graduates a year, the government needed an economy that grew more than 8 percent.
Since China became intent on promoting domestic demand and the services sector through deregulation and structural reforms, it decided growth of 7 percent could generate jobs of more than 10 million. The Chinese authorities have become less nervous about a slowing economy by accepting and promoting the trend as a “new normal.” The stock market plunge is an inevitable fallout from the transition. Some believe the Chinese authorities have lost policy ammunition and their actions no longer have any effect on a market that was mostly directed by the government rather than the free market. Panic has grown amid fears that the economy was headed for a hard landing because the navigators have lost control. But the so-called new normal policy proponents aren’t worried. They argue the government has been sitting on the sidelines even when the stock index fell.
We cannot know who is right. But one thing is certain. China will chart its own way and stick to that path. It claims to be market-friendly, but it won’t allow complete liberalization. China will continue with its experiment of a hybrid system that is neither a fully free market nor state-controlled. The global markets could take heavy beatings as it continues with its experiment. Our markets and industries are no exceptions. A quarter of our exports go to China. About 170 percent of Korea’s surplus is from trade with China. The slightest of sneezes from China can send Korean companies into the intensive care unit. Although we are not totally vulnerable to the Chinese economy, we are coping poorly with China’s new turns in economic policy. China aspires to become the world’s biggest consumer market, not its factory. China is no longer a country that imports parts to sell cheap copycat products. Thanks to its colossal population, the country has become one massive marketplace.
Can Korea remain appealing to the new China? Korea has the arrows, but lacks direction. Without a direction, an arrow cannot hit a target. Korea’s intermediary goods no longer sell in China. It must be able to target China’s luxury consumer and services sectors. Korean smartphone and automobile brands are already outstripped by local counterparts. There is hope yet in the services area. One out of 10 Chinese get their teeth taken care of by unlicensed doctors. There is one dentist for every 30,000 Chinese. In Korea there is one for every 2,500. Korean medical skills are world-class. They can do well in the Chinese market. The government must pave the way so our value-added services can make inroads in the massive market. There is always opportunity in the midst of crisis.
JoongAng Ilbo, Aug. 26, Page 28
*The author is the business and industrial editor of the JoongAng Sunday.
by Kim Jong-yoon