By Kim Jae-kyoung
Staff Reporter
China has been emerging as the biggest threat to the Korean economy, with Korea's main export growth engine for over a decade losing steam at an unexpectedly fast pace in the wake of the global economic recession.
Despite a four trillion yuan ($586 billion) stimulus package, China's economic growth plunged to 6.8 percent last quarter, bringing down the 2008 annual growth to a seven-year low of 9 percent.
High dependence on China has made Korea particularly vulnerable to emerging China risk. The country takes in around 23 percent of Korea's total exports, and accounted for 28 percent of Korea's GDP growth during 2003-2008.
Many believe that the deepening slump in the U.S. is a major stumbling block to Asia's fourth largest economy and China would be a savior, but the ``China as savior'' story does not seem to be playing out any more as it is no longer a source of growth.
``The major driver of the drop in Korea's exports is neither the U.S. nor Europe but China ― its biggest trading partner. Korea's exports to China underperformed its overall export growth since September,'' Morgan Stanley Research Vice President Sharon Lam said.
``And it is getting worse. In December alone, Korea's exports to China dropped 33 percent year-on-year. I thought China would be the savior to Korea but this doesn't seem likely to be the case, at least for now,'' she added. Lam forecast Korea's overall export growth to slow by 20 percent this year.
The Korean economy shrank 5.6 percent quarter-on-quarter between October and December last year, the biggest contraction in 11 years, with exports dipping 11.9 percent following a 1.9 percent drop in the third quarter.
The problem is that the worst is not behind China. The Chinese economy is expected to slow down further.
According to the Korea Center for International Finance (KCIF), China is being exposed to four key downside risks ― falling exports, rising unemployment, a sluggish property market and massive capital outflow.
China's exports slumped last month at their fastest pace in a decade, with their value declining by 2.8 percent year-on-year, the worst performance since April 1999, while its imports plummeted by 21.3 percent.
Many economists believe China will expand by no more than 5-6 percent this year due to a sharp fall in exports and weak domestic demand.
In its latest report, the World Economic Forum (WEF), warned that a ``hard landing'' for China's economy, with annual growth dropping to 6 percent or less this year, was a mounting danger to world economic and geo-political stability.
This is much lower than the 8 percent growth target set by the Chinese government. Growth of 8 percent is regarded as the minimum China needs to create enough jobs for people entering the workforce and maintain social stability.
Nouriel Roubini, the New York University professor who predicted last year's economic crisis, said that China is already in a recession, forecasting its growth rate to fall to 5 percent or lower in 2009.
The bigger concern is that the faster-than-expected slowdown is fuelling fears of social unrest in China. Slumping exports have already closed thousands of factories, forcing as many as 10 million migrant workers nationwide out of their jobs.
Choi Jae-young, a Beijing resident who runs Opex Consulting, a firm specializing in offering consulting services for Koreans investing in China, said that the Chinese economy is in a much worse state than it looks from outside.
``The falling external demand has led to a wave of factory closures and layoffs, especially in China's export-driven southeast, Guangdong. Labor protests have occurred in some areas,'' he said.
``The biggest problem in China is rising unemployment. China's authorities worry that this will trigger social upheaval. That's why the authorities are keen on achieving 8 percent growth,'' he said.
`` The challenges are formidable. Growth could slow to zero before the stimulus works. Decreased global demand for its products is creating overcapacity and unemployment, especially at small firms,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.
``Workers need to be relocated and firms in trouble need to refinance their debt. Korea needs to prepare for two bad years. The key is to think long term,'' he added.
Market experts stressed that in order to minimize shock from the China's hard landing, the government should take aggressive stimulus measures through more rate cuts or fiscal stimuli.
``Now Korea has to survive this global recession on its own. The Korean government has recently accelerated in terms of coming up with stimulus measures that will prevent Korea from going into a depression, yet it will take time for the plans to be executed,'' Lam said.
``Stimulus measures have become ever more important. Both on monetary and fiscal sides, Korea has more room for further cuts and stimulus measures as their interest rate is at 2.5 percent and it has a low government debt level compared to other OECD countries,'' she added.
kjk@koreatimes.co.kr
|
yistory@koreatimes.co.kr
