As China’s economy falters, Korea must set a new course
Chung Duck-koo, Chairman of the North East Asia Research Foundation
The New Year’s outlook for the Chinese economy was grim, especially when taking into account January’s stock market crash and the falling value of the yuan. For the first time in 25 years, the country’s economic growth rate has fallen below the 7 percent level.
Given that official Chinese economic data can’t always be trusted, it is possible that the Chinese economy may be worse off than it appears. A few analysts have even argued that China’s economic crisis may be the trigger for the next global recession.
And with 20 percent of Korea’s trade “made in China,” we are in dire need of a solution.
To hear an expert analysis of the current situation, the JoongAng Ilbo sat down with Chung Duck-koo, chairman of the North East Asia Research Foundation, who for the past 10 years has become a regular fixture among China’s high-level economic officials.
The following is an edited excerpt from the interview.
Q. Your book “How China Really Sees Korea” was a big hit when it was published five years ago. How do you think China sees Korea today?
A. First of all, China does not fundamentally believe that all nations possess equal and fair rights. Bigger nations exert more influence while smaller nations need to adjust to their power structures.
China does not perceive South Korea as a longtime friend due to its alliance with the United States. But South Korea’s national capability and geopolitical factors make it a difficult power for China to ignore. Beijing will maintain a close relationship with Seoul as long as it is profitable for China. That said, China’s friendship with South Korea is rather limited, and Korea shouldn’t be surprised or disappointed if China sometimes ignores Korea or is too busy with its own affairs.
China’s stock market crash earlier in the year took the world by surprise. What caused the crash?
The main reason behind the crash was that investors perceived the future of the Chinese market to be unstable. A worldwide economic slowdown stalled China’s exports and lowered the growth rate. This, in turn, is affecting the stock market. The problem is exacerbated by the Chinese government’s faulty judgement. The government thinks it can control the market while, in fact, it’s the complete opposite. China’s political leaders related the market’s success with the people’s support of its political leadership; as a result, whenever stock prices fell, the government encouraged the input of vast sums of money to prop up prices. As more people jumped to invest, they added to the stock market’s instability.
Many people view the market to be unstable.
The Chinese political system and economic system are closely connected. The market expanded rapidly by moving in unison with the Communist Party’s leadership. However, marketization and globalization in synthesis is unraveling this unison. The market is taking leave of its home, the Communist Party.
Do you think it’s possible for China to reach its goal in economic growth?
The Chinese leadership should not herald an economic growth it cannot achieve in reality. It should stay away from obsessing over a high growth rate and be content with a growth rate of 4 to 6 percent.
Would you say the future of the Chinese economy is somber?
It is essential to discern whether the Chinese economy has hit a plateau or is just in a temporary spell of inactivity. The latter is easier to overcome. I do not think the Chinese economy has hit a recession. And fortunately, start-up enterprises are shooting up in China, developing smart cars and next-generation drones. If it can endure the next 10 years of restructuring, the Chinese economy should be back on track.
Do you think the economic slowdown in China will be the trigger for a prolonged global economic crisis?
Other than the United States, the economic slowdown in developed nations shows signs of protracting. The economic crises in emerging economies like China, Brazil, South Africa and Turkey, as well as unprecedentedly low oil prices, do not bode well for the global economic situation. Above all, the fall in total demand in China is creating a butterfly effect in the world economy. Even if China overcomes the crisis, the low-growth trend will continue for a while, pulling the world into a prolonged period of economic slowdown. I believe the Chinese economy is the seismic center of the worldwide economic crisis.
The Chinese economy thrived under former leaders Hu Jintao and Wen Jiabao. Why do you think it is suffering now under the leadership of Xi Jinping and Li Keqiang, who are perceived as stronger partners?
This is not a question of the Hu-Wen leadership doing better than Xi and Li. The current problem stems from excessive financial investment and neglected reforms under Hu Jintao’s leadership.
During the 2008 financial crisis, nations resorted to pumping money into the market to prop up the economy, and China pooled in about 4 trillion yuan ($615 billion). This excessive investment led to the excessive supply and fall of prices. This is when the marginal production of labor and the marginal efficiency of capital fell rapidly, weakening China’s potential growth. Beijing tried to overcome this problem through sheer political willpower, but it is not working well. As an aftereffect, the Xi Jinping administration has been unable to actively pursue economic policies in the midst of the political and social issues plaguing the country.
What is the dilemma facing the Xi-Li partnership?
There are three dilemmas: the real estate bubble, the stock market bubble and structural reform in the heavy chemical industry, which has seen excessive investment. The biggest dilemma of all is structural reform, for three reasons. First, structural reform in a widely invested sector means a high level of layoffs. Unstable unemployment may lead to social problems in the country. Second, most of the heavy chemical industry plants are situated in the three northeastern provinces; structural reforms here may lead to a regional uprising. Third, the growth rate falls drastically in the early stages of structural reforms.
But isn’t structural reform essential to revive the national economy?
The answer depends on which China perceives to be greater: the threat to its government or the threat to its national economy. If the focus is on resolving the economic crisis, the nation’s response should follow the rules of the market. But this will lead to a vast number of layoffs, which the Chinese Communist Party may not be able to endure, given that it maintained its leadership by promising and delivering economic growth to the people. Structural reforms may threaten the stability of the regime. The party will have to sacrifice itself to a degree and approach a well-balanced policy to overcome this dilemma.
Some analysts worry that the South Korean economy relies too much on China.
One-fourth of South Korea’s exports go to China and 20 percent of Korea’s trade is with China. This volume is not too high given the Chinese market’s share of the global economy. It is wise to spread out one’s investment, but reducing Korea’s economic involvement with China just because the Chinese economy potentially faces a collapse is not a wise decision. Korea should help China in its economic restructuring and set the course to take bilateral relations to a new level.
What about the competition between South Korean and Chinese companies?
For 20 years, since establishing diplomatic relations with China, South Korea has supported China’s parts industry with parts materials and capital goods. But China’s parts industry has now reached its saturation point. Korea needs to develop a new strategy in its economic relations with China by focusing on different industries’ varying needs and advancing beyond China.
What sector of domestic demand should Korea target?
With China’s rapidly aging society, future planning and retirement insurance and pensions have gained public attention. Because China is just starting out in this field, Korea can target that sector with its experience.
Additionally, environmental and sanitation problems and counterfeit goods plague the country - the domestic market for clean food and air is wide open in China.
And with the middle class and high-income groups expected to grow, Korea should also target high-end consumer goods, luxury brands and leisure and sports products.
BY Yoo Sang-chul and Park Jong-Keun [chung.juhee@joongang.co.kr]
with the Korea JoongAng Daily
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