[CONTRIBUTION] China risk and Korea's de-risking

The Korea Times

The Korea Times

Finance

Sat, December 9, 2023 | 11:44

Economy

CONTRIBUTIONChina risk and Korea's de-risking

Posted : 2023-08-21 15:57

Updated : 2023-08-22 15:51

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By Jeon Yong-bae

Concerns about the recent economic slowdown in China have significantly increased. On Aug. 7, a Chinese real estate developer, Evergrande (Country Garden) failed to repay the interest on two types of bonds worth $1 billion that had reached maturity. It experienced a temporary default.

On the 14th, another major developer, Sunac China Holdings, also failed to repay its corporate bond interest and China's second-largest real estate developer, Evergrande, which declared default in December 2021, filed for bankruptcy in a New York court on Aug. 16. Evergrande's total debt amounts to around 2 trillion yuan, equivalent to about 2 percent of China's GDP. The aftermath of the bankruptcy might be severe.

The Chinese real estate market, especially the housing market, has come to a standstill. As the real estate market, which accounts for a quarter of China's GDP, fails to revive housing demand due to economic slowdown and unemployment, housing development companies are facing bankruptcy.

These defaults are spreading to the financial sector, causing several trust companies to fail to repay the principal and interest to their customers. Daily protests by investors are taking place and the government is seeking various measures to tackle the situation. But it seems that this crisis will not easily be stabilized.

Jeon Yong-bae

As domestic and international demand shrink, concerns about an economic crisis are growing in China. Over the past few years, the debt level of individuals, corporates and especially local governments has increased. In the past three years, as domestic consumption froze due to COVID-19 lockdown measures, unemployment rates in major cities have increased and consumption has not yet recovered.

In addition, as demand weakens due to the tight monetary policies in the West ― the United States and Europe ― China's exports, which have driven its growth, are rapidly declining. As Western companies shy away from investing in China due to U.S.-China tensions and global supply chain restructuring, foreign direct investment to China has been rapidly declining, and foreign exchange conditions are not favorable.

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Reflecting these circumstances, the value of the yuan has sharply declined, falling to 7.3 yuan per dollar and reaching its lowest level since November last year.

China has not experienced a serious economic crisis in the past 30 years. Despite difficult times such as the 1997 foreign exchange crisis, the 2008 global financial crisis, the 2018 U.S.-China conflict and the recent two-year COVID-19 lockdown, China has recorded steady economic growth.

Structural issues hindering solutions

However, China's structural issues, such as the excessive debt of individuals and the government, a decreasing labor force and rapidly aging population, and prolonged U.S. tensions make it difficult for the government to find easy solutions.

Amid all of these developments, China's government is emphasizing the soundness of the Chinese economy to audiences at home and abroad. To stimulate domestic consumption, the government has lowered policy interest rates and actively implemented policies to encourage consumption.

However, it is still too early to guarantee the success of these efforts. Consumption and the service sector are expected to support growth, and government-led investment will be maintained at a certain level to compensate for the decrease in exports. In the long term, there should be a gradual transition to growth driven by domestic consumption.

If the Chinese economy, which accounts for 23 percent of Korea's exports, experiences a downturn, Korea will be the first and hardest hit. Until last year, Korea recorded a large trade surplus by exporting finished products and intermediate goods.

However, with the growth of China's intermediate goods industry, Korea's exports to China have declined. As a result, Korea recorded a trade deficit in the first half of this year, and there is a high possibility that this trade deficit will continue in the future.

Korea cannot afford to give up the vast Chinese market. Geographically close, Korea should explore competitive products such as automobiles and smartphones and target the Chinese market.

At the same time, there is a need to actively expand into key Asian markets such as India, Indonesia, Vietnam and Thailand as part of a long-term de-risking and diversification strategy to reduce dependence on China.

The writer is a senior consultant and auditor of Franklin Templeton Investments Korea, where he previously worked as CEO, and is a professor of the University of Maryland Global Campus' MBA program.