‘G2 risks’ are big fears for economy

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‘G2 risks’ are big fears for economy

The biggest challenges the Korean economy now faces are external risks from the world’s two superpowers, the United States and China, and as a result, a “flexible” currency and fiscal policy is required, a president-led advisory body said on Wednesday.

At the seventh meeting of the National Economic Advisory Council, held at the Blue House and chaired by President Park Geun-hye, policy makers were asked for recommendations on short-term risk management and preparations to face ongoing changes in China’s industrial structure.

Picking so-called G2 risks from the world’s two leading economies as the biggest challenges for Korea’s growth, the advisory members said, according to the Blue House, that “if the yuan’s value is not adjusted flexibly due to side effects from excessive investment … anxiety over the [Chinese] economy could be protracted.”

Another major factor is the possibility of the U.S. Fed raising interest rates, they said.

“Particularly, if a constant rise in U.S. rates accelerates capital flight from China, negative repercussions with anxiety over equity markets could be expanded,” they said, quoted by the Blue House.

Launched in May 2013, the body is a de facto think tank for Park’s policymaking in economic matters and comprises 30 members, including five economy-related ministers, renowned economists and private specialists in various sectors. Under the Constitution, the body is the highest advisory body for the president.

Former President Lee Myung-bak had established a number of president-controlled committees, but in her first term, Park abolished Lee’s committees and launched the body in their place. The body’s four subcommittees are for the creative economy, people’s economy, fair economy and macro-finance.

As for advice regarding short-term risk management, the participants proposed “a flexible adjustment” in currency policy based on supply and demand in the foreign exchange market.

Structural reforms for defaulted companies should be encouraged, and surging household debts should be curbed by tightening regulations, they said.

In case of another shock in the global currency market, just like the surprise Aug. 11 devaluation of the yuan, Korean policy makers should take preemptive actions to reduce risk through strengthening soundness at financial institutions, they said.

In terms of the Korean central bank’s currency policy amid signs that the Fed will postpone a U.S. rate hike to next year, the participants said, “Independently from the U.S. rate policy, we should consider our own situation, such as growth or inflation, and take actions accordingly,” and that “a fiscal policy should prepare a contingency plan to save unnecessary time to take steps in an emergency situation.”

In response to the rapidly changing Chinese market, the advisors said Korean policy makers should prepare for measures to expand market share in China first. Currently, Korea’s exports to China accounts for nearly a quarter of Korea’s entire exports.

“In the 2000s, our economy was the biggest beneficiary from the so-called China effect,” they said, cited by Blue House. “But if we just continue to settle with the status quo, we won’t be able to avoid slowdown in growth.”

BY KIM JEE-JIN [kim.heejin@joongang.co.kr]
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