China’s party is over
The Korean economy made a stunning transition, with per capita income that was under $100 in the early 1960s hitting $27,000 in 2014. Living standards improved by nearly 20 times. The country’s rags-to-riches transformation was not entirely smooth. Looking at the data, the local economy was interrupted by major crises three times over the decades. The Korean economy contracted 1.7 percent and inflation neared 30 percent in 1980 due to the repercussions of the second global oil crisis. The Asian financial crisis shook the country’s economy in the late 1990s, and the economy contracted by 5.5 percent in 1998. It grew just 0.7 percent in 2009 following the global financial meltdown in 2008.
Those economic blows primarily came from outside. Because the economy is mostly driven by exports, it relies heavily on external factors. Global economic slowdowns, movements of short-term foreign capital and surges in international commodity prices can always rattle the local economy.
The Korean economy is expected to pick up when the developed markets do better. The International Monetary Fund estimates the Korean economy to grow 3.2 percent in 2016 and 3.5 percent in 2017. But we must not get our hopes up too soon. Others warn Korea is headed for another bumpy ride due to external shocks.
The next blow could come from China. Korea benefited greatly from China’s astonishing growth. Reliance on the Chinese economy has doubled over the last decade. Exports to China account for about 13 percent of the local gross domestic product. When China sneezes, Korea can catch a severe cold.
Korea has been warned of a China double whammy. The first is sluggish exports if China’s slowdown is protracted. The second is the economic impact of China’s fiscal, financial and corporate troubles. The first blow is almost certain to land, while chances of the second are low but could be fatal if it occurs.
The two major engines that drove the Chinese economy - exports and investment - have lost a lot of steam. China cannot go on pumping in capital tantamount to half its gross domestic product now that investment yields are low due to overcapacity. The growth in fixed capital expenditures for investment has been slowing for several years. After it became the world’s second-largest economy, there was a limit to its exports growth. China’s exports fell in terms of both U.S. dollars and Chinese yuan. Private consumption and services grew, but they aren’t big enough to replace investment and manufacturing. The services sector does not require as many imports as manufacturing and construction, and therefore, its expansion won’t help Korean exports much.
Chinese President Xi Jinping pledged to double average incomes of the Chinese by 2020 from 2010 levels. To keep that promise, Beijing must keep the economy growing by at least 6.5 percent through fiscal and monetary easing and currency devaluation. But sustaining growth at 6 percent won’t be easy with a thinning working population, declining investment rate and slow progress in reform and productivity improvement. China’s per capita income in terms of purchasing power is on par with what Korea earned in 1990. Korea’s annualized growth rate slowed to 4.1 percent in the 2000s after 6.3 percent in the 1990s and 9.3 percent in the 1980s. China is headed down a very similar path.
China could also face serious upheavals during structural transitions. Local governments have gone on a spending binge by borrowing recklessly through various loan platforms. The fiscal deficit already hovers at 8 percent of the gross domestic product. Corporate debt is 160 percent of gross domestic product, double that of the United States. The bulk of debt is owed by state enterprises with poor profitability. Despite the growing mountain of zombie enterprises, China doesn’t dare to clean them up.
There is no need to be greatly alarmed, since Beijing’s fiscal condition is solid and insolvency rates at financial institutions aren’t that big. But if Chinese authorities push ahead with stimuli to meet growth targets, public and corporate debt would pile up further and raise bigger risks. If development inequalities between urban and rural areas and rich and poor widen, political and social conflicts can arise, leading to economic crises. The spectacular party China enjoyed over the last three decades may be fizzing out. We cannot decipher what awaits China in the future. But China is gearing into slower growth of 5 percent to 6 percent over the next decade.
We must be well prepared for a slowing Chinese economy and China-triggered crises. We must seek out new growth engines. We should slowly reduce our export reliance on China and expand trade with other emerging economies for diversified demand. We need to work harder in developing new innovations and honing competitiveness to keep our edge in global market. We must find other kinds of exports from the services sector. We need to promote more small and midsize enterprises and the value-added services industry to create more jobs and strengthen domestic demand.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Nov. 27, Page 35
The author is an economics professor at Korea University and former senior economist at the Asian Development Bank.
by Lee Jong-wha