Outlook murky for Korean economy as China fails to rebound

China's exports drop 14.5% in July

By Yi Whan-woo

The outlook for the Korean economy is apparently becoming bleaker as China, the world's second-largest economy, continues to falter more than halfway through 2023, according to analysts, Wednesday.

They said Seoul should accelerate efforts to restructure trade with Beijing after focusing heavily on exports of intermediate goods for domestic consumption in China.

They also noted weakened domestic demand in China compared to before the coronavirus pandemic was not something that could recover simply with Beijing abandoning drastic “zero COVID” measures beginning this year, but instead requires more time to normalize.

“Weakened domestic demand (in China) is related to a shrinking population, surging youth unemployment, a deepening real estate slump, worsening debt held by regional governments and other economic risks that were beginning to haunt the Chinese economy even before the pandemic era.” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

Lee assessed the aforementioned risks are expected to continue for years after the pandemic, and in that regard, “Korea was too naive in its belief that China's reopening would boost the trade-reliant economy right away.”

His comments came after the Ministry of Economy and Finance repeatedly referred to China's reopening in its assessment that the Korean economy will remain sluggish in the first half of the year, but will pick up pace in the following half.

Nevertheless, the finance ministry lowered its 2023 economic growth outlook for Korea to 1.4 percent from 1.6 percent.

“I'd say expectations should be lowered regarding the spillover effects of China's reopening, because China's economic activities are not fully back on track,” said an economist at a private bank who asked not to be named.

China's gross domestic product (GDP) expanded 6.3 percent in the second quarter compared to a year ago, falling short of the market consensus of 7.1 percent.

But China's unemployment rate surged to a record 21.3 percent in June for those aged 16 to 24, while investment in property development, a vital driver of both industrial and consumer demand, retreated 7.9 percent year-on-year in the first half.

China's exports also dropped 14.5 percent in July from a year ago, continuing to contract for three consecutive months. Its imports also shrank 12.4 percent in July, as diverse economic stimulus measures by Beijing are failing to turn the economy around.

Correspondingly, Korea's exports to China slid 26.1 percent year-on-year to $60.1 billion in the first half, according to Bank of Korea (BOK) data.

Separate data from the Ministry of Trade, Industry and Energy showed Korea's outbound shipments to China shrank 25.1 percent to $9.9 billion in July as chip demand plunged.

The trade ministry's data also showed Korea's overall exports declined for the 10th straight month as of July.

“The change in the Korea-China trade trend suggests we should overhaul the related structure because otherwise the situation will get worse,” the economist said.