Bracing for a Chinese tsunami

A Chinese tsunami has bombarded financial markets at home and abroad from the first trading day of the New Year. A nearly 7 percentage fall in Chinese bourse led to an early close after struggling with gloomy economic indicators, including the Purchasing Managers’ Indices and the weakening yuan. The shockwaves caused major Asian stock markets to drop by 2 to 3 percent. The strengthened U.S. dollar also caused the Korean won to lose its value by almost 10 won per dollar, reviving the nightmare of the instability of the Chinese stock markets last June and August.

The fall in the Chinese markets is smaller than that of Aug. 24 (negative 8.49 percent) and 25 (negative 7.63 percent). But at the time, China did not have a circuit breaker system to avert a precipitous rise or fall of stock prices. If China had not resorted to the mechanism introduced from this year, this stock plunge could have been the steepest in history.

Despite uncertainties over the repercussion, it became clear that even investors in China are not confident about the future of the Chinese economy. Beijing has kicked off a full-fledged campaign to focus on domestic consumption away from exports and manufacturing. It seeks to improve China’s economic structure by lowering its annual growth rate to 6.5 percent from 7 percent over the next five years. China is accelerating efforts to streamline its steel and shipbuilding industries stuck in oversupply due to excessive investment and alleviate industrial competitiveness through technology development.

But external circumstances are not friendly, as lackluster global demand and decreased trade are expected to continue through the year. If the pace gains momentum, China could hardly achieve the goal of 6.5 percent growth this year. Washington’s apparent raising of the federal funds rate also can work negatively for the global economy. Plummeting prices of crude oil and other materials along with the strong greenback can also hurt the world economy by reducing global demand, which again may lead to decreased exports and growth in China. The fall in China’s bourse reflects those pessimistic forecasts. President Xi Jinping warned that stimuli policies may not be effective when China faces more challenges over the next five years.

China risk is the biggest factor for our economy given that a fourth of our total exports goes to China and 40 percent of our overseas investment is made in the country. But if we can thoroughly prepare for a mega-tsunami from China, we can minimize the damage. The key is strengthening our fundamentals by accelerating restructuring across the board.

JoongAng Ilbo, Jan. 5, Page 30