Korean companies in China remain pessimistic, KIET says

Containers are piled high at the port in Incheon on July 11. [NEWS 1]

Korean companies in China are expecting weak sales and worsening market conditions as China’s economy records the weakest growth in over two years.

The business survey index (BSI) of 211 Korean businesses operating in China dropped for both market conditions and sales for two consecutive quarters, according to the Korea Institute for Industrial Economics and Trade (KIET).

A BSI figure above 100 means companies responded that a certain area improved or increased, while below 100 would mean companies answered that conditions in the area has deteriorated or decreased.

The market conditions reading was 64, and for sales it was 76, both the lowest numbers since the second quarter of 2020. Sharp sales falls were reported by mid and small-sized firms and most sectors excluding electronics.

The business environment index (54) fell to its lowest since the first quarter of 2020 and local sales (76) declined for two consecutive quarters.

Around 22 percent of the companies said lack of demand in the local market was one of the difficulties they faced, followed by supply issues of raw materials and low export.

Gross domestic product (GDP) in China expanded by just 0.4 percent in the second quarter, according to China’s National Bureau of Statistics on July 15.

This is a sharp drop from the first quarter’s 4.8 percent.

The shrinking market economy and Covid-19 lockdowns were some of the contributing factors.

Eight out of ten companies answered the pandemic negatively affected their businesses in China, according to the KIET. Lockdowns and disruptions of the supply chain are seen to have influenced the negative response.

“Before, China was able to get away from the influence of the pandemic, but other pandemic-related policies such as lockdowns this year have caused economic activities in China to reduce,” said Cho Chul, a KIET researcher.

“As global demand has declined, it would be difficult for the Chinese economy to recover quickly like last year and the year before.”

With Korea’s high reliance on exports to China, domestic companies are in serious danger.

China took 25.3 percent of the country’s total export sales last year.

Analysts say domestic companies will face difficulties operating businesses in China in the future and that the trade deficit will worsen.

Export volumes to China were in deficit for the first time in 28 years in May, which continued to June.

According to a report released by the Bank of Korea in May, one percent fall in China’s GDP growth causes a drop of 0.34 percentage points for total exports in Korea.

In the third quarter, the index is expected to stay at 99 for equipment investment and 94 for the business environment sector, despite expectations of market conditions and sales going over 100.

“Even industries that had some demand from the local customers like automobiles are having difficulties along with small and mid-sized companies that have entered the Chinese market together due to the sharp decline in production within China,” said Cho.

“It is highly likely that Korean companies will have a hard time running businesses in China in the future.”

The deficit in exports to China is anticipated to continue.

“There is a high possibility that exports will continue to fluctuate and worsen the deficit situation,” said Cheong In-kyo, a professor of international commerce at Inha University.

China's economy may not have hit the bottom, yet.

“It is hard to say China’s economic growth reached its lowest in the second quarter since it is very likely that the country will continue imposing lockdowns in the future with the resurgence of the Covid-19 pandemic,” said Kim Jung-sik, an honorary professor at Yonsei University’s School of Economics.

“It would be difficult to get away from the current situation as China’s exports are declining due to the shrinking market economy globally.

“The Korean economy will definitely be affected as our export volume to China is high.

“The government should therefore diversify the current market and gradually reduce reliance on China, and make effective finance measures such as on the currency and interest rates to shift the current trade deficit to surplus.”

BY CHUNG JONG-HOON [cho.jungwoo1@joongang.co.kr]