The China risk hits Korea

The “China risk” after President Xi Jinping entered his third term has delivered more upset to the already-fragile financial markets around the globe. The Hang Seng Index fell to a near 14-year low, falling under 15,000 for the first time since April 2009 amid the global financial crisis. The Hong Kong financial market has been the window for fund-raising for a number of Chinese enterprises.

Big-tech firms suffered most. Alibaba, Baidu and three other Chinese big-timers trading in the U.S. lost their market cap of $52.1 billion after Xi’s grip for another term was declared. The Chinese yuan also shook. The currency fell to the lowest in 15 years in Shanghai exchange markets. In the offshore market that is beyond the control of Beijing authorities, the dollar rose to an all-time high of 7.3 yuan.

The Communist Party of China (CPC) which wrapped up its twice-a-decade National Congress on Sunday pronounced a historic third term for the strongman Xi Jinping. Out went the dovish and reform-minded premier Li Keqiang to make way for close followers of Xi. Under the unchallenged command, Beijing is anticipated to toughen control over private economic activities on the grounds of social wealth and modernization of socialism. The stock and currency’s free fall reflects the market’s disappointments at the political direction led by Xi.

Korea will inevitably be affected as the market couples with China’s due to its high reliance on trade with China. China remains the top export market for Korea. Its shipments to China have been contracting since June against a year-ago period. The markets have been resilient so far, but they can be shaken at any moment.

The default of securities related to Legoland Korea has underscored the fragility of the Korean financing market. Equity-linked securities (ELS) following Hong Kong stocks are poised to incur major losses. The outstanding balance on ELS connected to the Stock Exchange of Hong Kong exceeds 20 trillion won ($14 billion).

Economic conditions for next year are worse than this year. American credit rating agency Fitch forecast that Korea’s growth would stop at 1.9 percent next year. The Hana Institute of Finance puts Korea’s growth at 1.8 percent in 2023. On top of higher prices, soaring interest rates and the strong dollar, Korea’s exports and consumption are slumping. But politicians are oblivious to the economic dangers as they are too busy fighting for party interests. The alarms going off across the board in the economy must not be taken lightly. The government and politicians must join forces to fight the economic crisis.