Cooling Chinese demand may dampen Korea’s economic recovery

Home > Business > Economy

Cooling Chinese demand may dampen Korea’s economic recovery

Published: 21 Aug. 2023, 16:46 Updated: 22 Aug. 2023, 09:42

A Country Garden Holdings apartment project is located on the outskirts of Beijing on Thursday. [AP]

China's consumer demand, dampened by deflation fears and the decaying real estate market, is clouding Korea’s hopes for a turnaround in the second half of 2023.

Its staggering economy may weigh down Korea’s key sectors, such as chips, though some experts say repercussions will be limited.

The Korean government and the Bank of Korea have been hoping for the economy to recover in the second half, but such expectations have largely revolved around the positive effects of China’s reopening.

China’s economy has been stalling as its consumer price index and producer price index both logged minuses for the first time in two years. The country’s exports plunged 14.5 percent on year in July, which was the steepest dive since February 2020.

Chinese property developer Country Garden Holdings teetering on the brink of default added extra weight by spreading fears of a spillover into the broader economy.

Korea's exports to China have been shrinking for 14 months straight as the Chinese markets slowed.

“If China’s growth drops below 4 percent, Korea will inevitably face declines in export demand, including semiconductors, and may see impacts in the trade balance and current balance,” said Ha Joon-kyung, professor of economics at Hanyang University.

Ramifications may spread to currency markets too.

“Korea and China share similar problems, although their scales differ,” said Yang Jun-sok, professor of economics at the Catholic University of Korea. “The won has been falling sharply in the past month but may lose more ground alongside the yuan and affect the central bank’s rate-setting decision.”

Construction workers hang outside an apartment building in Beijing on July 29. [REUTERS]

Nevertheless, China’s closed economy and Korea’s continued efforts to "de-risk" from China are widely expected to contain the fallout.

“China’s real estate crisis resulted from a liquidity crunch by the government and is not a structural issue,” Kiwoom Securities analyst Hong Rok-ki said. “It’s unlikely to develop into a widespread risk and will have limited influence on Korea’s exports to China.”

“Unlike the U.S. subprime mortgage crisis which was entangled with foreign derivatives, the Chinese real estate issue is local and has a relatively transparent cash flow,” said Kang Jun-young, professor of Chinese studies at Hankuk University of Foreign Studies.

The Chinese government is unlikely to sit and watch its economy falter.

“China has been going all-in to pump up domestic demand, holding six economic meetings and introducing 10 economic support measures between July 16 and Aug. 1,” said Jeon Byung-seo, head of the China Economic and Financial Research Institute.

“It was then ambushed by property developers amid such efforts. If China turns a blind eye and lets them fail, chances of a recovery in the second half will be slim and the Xi Jinping-Li Keqiang leadership will suffer a lethal blow,” Jeon added.

Finance Minister Choo Kyung-ho also said in a meeting with economic ministers Sunday that China’s property market crisis will have a limited effect on Korea.

Choo on Wednesday reaffirmed the government’s outlook for an economic turnaround in the back half of 2023 during a press briefing at the government complex in Sejong.

“Many institutions expect the economy in the second half to grow twice as much as in the first half,” he said, naming China’s delayed reopening, along with Russia’s war of aggression against Ukraine and fluctuating oil prices, as ongoing uncertainties.

BY JEONG JONG-HOON, NA SANG-HYUN [sohn.dongjoo@joongang.co.kr]