[NEWS IN FOCUS] As China's growth slows, Korea is likely to follow

Chinese flag raised at the opening ceremony of the Winter Olympics held in Beijing earlier this month. [YONHAP]

When China catches a cold, Korea sneezes, and this is becoming more of an issue as the growth of world's second-largest economy begins to slow.

Exports could get hit, and that could affect the post-Covid recovery in Korea.

According to a study by the Hyundai Research Institute, when China's economic growth rate declines 1 percentage point, Korea's economic growth rate falls 0.5 percentage points.

So as Korea emerges from the turmoil of Covid, it is facing uncertainty as its largest trading partner begins to face headwinds.

A blow to the Korean economy

In 2021, Korea's economy grew 4 percent, which is the sharpest increase since the 6.8 percent in 2010. This was a rebound from a 0.9 percent contraction in 2020, when Covid-19 was spreading globally.

This year, the Korean government has set its target at 4 percent.

As China faces the aggressive spread of the Omicron variant, its economy could stumble and put this target in danger.

In recent years, Korea has been moving closer to China economically.

The countries signed a free trade agreement in 2014, and it went into effect in 2015, and Korea is joining the Regional Comprehensive Economic Partnership of 11 member countries, where China is a key member.

China accounts for 15 percent of the world's trade and takes a quarter of Korea's exports.

Last year, Korea's exports reached a record $644.5 billion, but a trade surplus rally that has lasted for 20 consecutive months came to an end in December. The country recorded another trade deficit in January.

This is the first time that Korea's trade deficit has continued for two consecutive months in 14 years.

The trade deficit has largely been the result of the unstable energy market that has been driving up crude oil prices. And the situation could remain unfavorable particularly due to the ongoing conflict in Ukraine.

China is not only the biggest consumer market for Korean products, but it is also the key suppliers of parts and materials as vividly experienced during the urea-solution crisis of late 2021.

According to the Federation of Korean Industries, Korea's reliance on parts and materials from China was 29.3 percent in 2021. That's higher than the 28.9 percent for Japan and the 12.9 percent for the United States.

Slowing China
In 2021, the Chinese economy grew 8.1 percent, but toward the end of the year, it started to slow. In the first three months of the year, the GDP grew 18.3 percent. In the last quarter, it grew 4.0 percent.

And much of the growth was the result of the base effect, as the GDP grew 2.3 percent in 2020.

"The 4 percent growth in the fourth quarter was largely due to industrial production and exports holding up," said Kim Kyung-hwan, Hana Financial Investment analyst. "Private consumption is shockingly bad."

The Chinese government is expected to set its growth target for this year at 5.5 percent during its National People's Congress in March, according to Standard Chartered Bank.

The bank projects this year's growth at 5.3 percent, citing the Chinese government's measures for preventing the economy from flagging, such as increased fiscal spending.

Chinese policy makers have been implementing several stimulus measures, including cutting interest rates as other countries are raising rates.

The People's Bank of China (PBoC) in December lowered the reserve requirement ratio for banks by 50 basis points and the re-lending rate by 25 basis points.

Last month, the Chinese central bank surprised the world by cutting rates on medium-term loans for the first time since April 2020.

"We should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner," central bank Deputy Gov. Liu Guoqiang said during a press conference in January.

Shaung Ding, Standard Chartered Bank's chief economist on greater China and North Asia, said the policy moves will contribute to the improvement of the Chinese economy this year.

The economist noted that while growth in the third quarter last year was stalled due to a "perfect storm" of Covid-19 outbreaks, macro and regulatory policy tightening and power outages, the situation started to turn around in the fourth quarter driven by strong external demand.

"The People's Bank of China has recently loosened monetary policy by cutting the reserve requirement ratio and policy rates, bucking the trend of policy tightening by major central banks," Ding said. "These policies should help to bring growth to its potential level.

"Policies intended to boost domestic demand should benefit China's major trading partners, including Korea."

Kim Yoo-mi, a Kiwoom Securities analyst, agrees that the Chinese government might make additional stimulus moves, including another cut, to prevent the Chinese domestic market from falling further.

"Consumer prices in China grew 0.9 percent year-on-year, a drop for two consecutive months," Kim said. "Shrinking consumption caused by the sluggish economy has led to the fall of consumer prices."

Doubts
The International Monetary Fund downgraded its global economic growth projection for this year from 4.9 percent projected three months ago to 4.4 percent in its latest report released in January.

It cited the slowing growth in the United States and China.

"The global economy enters 2022 in a weaker position than previously expected," the IMF's growth outlook report noted.

The IMF raised concerns over the collapse of the real estate sector and the Chinese government's zero-Covid policy, which keeps businesses shut and reduces consumption.

It lowered its 2022 GDP growth forecast for China from 5.6 percent previously to 4.8 percent.

Other institutions that projects China's economy to grow below 5 percent include Citibank and JP Morgan, both of which forecast 4.7 percent growth for this year, as well as Goldman Sachs and Nomura Securities, both projecting 4.3 percent.

The OECD and the World Bank estimate China's economy to expand 5.1 percent, down from previous estimates of 5.8 percent and 5.4 percent, respectively.

Even considering the base effect, China's economy has been slowing since 2017 as it has been struggled to grow more than 7 percent since 2017.

China's real estate slump is considered as one of the key contributing factors. The country's property market generates about 30 percent of the GDP.

Reckless development has led to major defaults, including the near bankruptcy of the Evergrand Group, with George Soros warning against an economic crisis in China caused by the collapse of the real estate market.

"China is facing an economic crisis centered on the real estate market, which has been the main engine of growth since Xi Jinping came to power in 2012," Soros said during a speech at Stanford University's Hoover Institution last month.

Noting that the Chinese real estate boom is based on an "unsustainable" model, Soros said the falling prices will turn many who invested a bulk of their saving in real estate against Xi.

"The current situation doesn't look promising for Xi," Soros said.

Standard Chartered Bank's Ding believes that the real estate investment situation will likely turn around as the Chinese authorities started to "fine-tune" property polices late last year to stabilize investment and guard against systematic financial risks.

"Regulatory guidelines were introduced over the past two years to discourage developers from borrowing excessively, leading to a credit crunch," Ding said.

He added that the Chinese government has been encouraging banks to accelerate mortgage approvals and meet reasonable credit demand from "high-quality" developers.

Another key factor holding back China's economic growth has been the Chinese government's restrictive zero-Covid regulations, which have limited consumption.

"Roughly since last summer, the outbreaks have become more frequent, therefore lockdowns have become more frequent," said Helge Berger, IMF China mission chief, during a press briefing last month.

"Because we have no reason to expect that these outbreaks will become less frequent in 2022, this is one of the big reasons why we have lowered our forecast for the year"

Feeling the heat
A survey conducted by the Korea Institute for Industrial Economics and Trade and the Korea Chamber of Commerce and Industries found that Korean companies operating in China have unfavorable views about the shrinking consumption triggered by the sluggish growth.

The survey conducted between November and December found that the business confidence of 212 Korean companies on sales was 99. A reading below 100 indicates that more Korean companies are pessimistic.

Among those that participated in the survey, 24.2 percent said sluggish sales in China was the biggest business challenge, while 18.7 percent cited rising labor costs and 17 percent raw materials.

Standard Chartered Bank's Ding said pandemic restrictions have contributed to China's economic growth in terms of keeping the disruption of supply chain at minimum.

"With exports reaching a record high last year, China proved itself a reliable source of supplies," Ding said. "It can be argued that global inflation would have been much higher if production and shipping in China were affected to the same extent as the rest of the world."

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]