Tremors from China

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Tremors from China

Repercussions from crashes of Chinese stock markets ring loud alarm bells across our economic frontier. Following a precipitous fall in Chinese shares shortly after markets opened on Monday, trading was suspended. Yesterday the same thing happened and the market closed thirty minutes after opening due to a more than 7 percent plunge. A circuit breaker system China introduced this year to avert volatility was activated for the second time in four days. A precipitous lowering of the value of Chinese yuan - 0.51 percentage-point plunge compared to the previous day - played a big part in Thursday’s crash. The yuan’s value has hit the lowest point since the fall of 2011. Some members of the foreign press said Beijing has lost control over the Chinese currency.

The shock waves adversely affected our financial markets. The Korean won’s value has been nearly in sync with the fall or rise of the yuan and Chinese bourses. The won’s value has dropped to 1200.60 won per dollar. Our currency has been devalued over the ceiling of 1200 won per dollar for the first time since September 2015. If the won falls slowly, it helps our economy, but if the won falls rapidly, it has a bad impact on the economy. The steep fall of the won could spark a foreign exchanges crisis stemming from a massive capital flight from Korea. We can hardly reassure ourselves by pointing to last year’s $110 billion current account surplus and $368 billion foreign exchange reserves.

The World Bank has lowered its outlook for world economic growth to 3.6 percent from 3.9 percent. The Bank of Korea expects our so-called potential economic growth rate to barely reach the 3 percent range this year. But if the China shock gains momentum, those forecasts are meaningless. Global investment banks like Bank of America have come up with the utterly pessimistic prediction that the Chinese stock market will fall as much as 30 percent this year. If China’s bourses lose the vitality they were proud of, the won’s value could fall beyond control.

The time has come for the government to brace for future China shocks - not as a variable but as a constant. Korea is currently undergoing a transition in leadership of its economy after the government appointed a new deputy prime minister for the economy to replace the outgoing minister Choi Kyung-hwan. The confirmation process may cause a vacuum in the leadership. The government must kick off negotiations with the United States and Japan over the resumption of currency swaps. Top priority for the new deputy prime minister is stabilizing the won’s value and financial markets.

JoongAng Ilbo, Jan. 8, Page 30
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