A perfect storm from China and Russia

Kim Chang-gyu

The author is the economic news editor at the JoongAng Ilbo.

In a recent report, JP Morgan Chase pinned China and Russia as “trouble spots” for corporate defaults next year. The bank projected a property crisis in China will drive 20 percent of its “junk-rated” companies into default and West-led sanctions will force 66 percent of such enterprises in Russia to the same fate. Their troubles will trigger a more than 10 percent “high-yield” corporate default next year in the emerging markets, which would triple the historical average.

The default rate of 52 percent in the real estate sector in China this year would see another 46 percent next year. Real estate activities make up 30 percent of China’s GDP. The bank also forecast a $28 billion worth Russian corporate defaults next year. Russian companies have been unable to meet dollar-denominated bond obligation due to sanctions by western countries. Risks from the colossal economies of China and Russia could pose another shockwave to the global economy — a slowdown or recession next year.

China remains South Korea’s largest trading partner. Since the normalization of ties in 1992, Korean exports grew in line with its sizzling outbound shipments to China. The share of exports to China that took up around 10 percent of Korea’s total exports in 2010 peaked at 26.8 percent in 2018 and is around 23 percent these days.

China is still responsible for about one fourth of Korea’s total exports. Although exports to Russia are 1.5 percent, Korean exports to Europe have been affected due to the energy crisis triggered by the Russia-Ukraine war. China, the U.S., and the European Union take up nearly half of Korean exports. The Korean economy would shake if the regions are in trouble. The Korean economy is structured to come under the sway of external factors as it is an open market relying on trade with a certain group of countries.

The external environment is worsening. Many analysts warn of a harder year in 2023 with a perfect storm of slowed economy, decreased exports and a financial market crisis.

China dubbed the global factory is losing steam fast. Its GDP grew 4.8 percent in the first quarter, 0.4 percent in the second, and 3.9 percent in the third. U.S.-led sanctions, Covid-19-related lockdowns, anti-business policy and the Ukraine War have landed hard on the world’s second largest economy.

After Chinese President Xi Jinping entered his third term, many think China would be ruled by ideology rather than practicality. Since political agenda comes first, economic issues could be pushed back. The government control over companies would strengthen, causing more troubles for the Chinese economy. The real estate instability rattling the economy shows few signs of easing. Standard & Poor’s projected that as many as 2 million residential units lay abandoned. The U.S. and eurozone economies are expected to recede after sharp increases in interest rates to tame inflation.

The negative developments have already affected the Korean economy. Exports last month fell 5.7 percent, the first on-year contraction in two years. Trade balance has been in deficit for the seventh straight month, largely due to the subdued demand in China. If Korea must keep open trade due to a lack of natural resources, it must strengthen fundamentals to weather external challenges. It must diversify its trade portfolio and develop “chokepoints” in technology competitiveness. Complacency must be kept at bay. Incentives should be provided to companies successful in developing new core technology. “Permacrisis,” a portmanteau of “permanent” and “crisis,” has been chosen by the Collins Dictionary as the word of the year 2022. It may be not easy to avoid the looming crisis, but at least we should prepare to the utmost to minimize the damage.