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By Cho Jin-seo
Staff Reporter
Economists used to say that when the United States sneezes, South Korea catches a cold. Now, the same metaphor is being used to refer to the economic relationship between Korea and China.
Policymakers and investors are increasingly worried that a possible slowdown of the Chinese economy this year could cause a snowball effect and hinder Korea's recovery from the financial crisis.
Strategy and Finance Minister Yoon Jeung-hyun is aware of Korea's high exposure to its giant neighbor.
"We have to keep our eyes on changes in the Chinese economy, because a large portion of our economy depends on it," he said during a meeting of top government finance officials Wednesday.
"There are big risk factors in China, such as a bubble in asset prices. We are going to take into consideration ripple effects on our financial market and exports, and we will set up contingency plans," he added.
Changes in economic conditions and policies in both the United States and China have had great implications for Korea's trade-oriented economy, and are now being referred to as "G2 risks."
But China's clout is outgrowing that of the United States. The KOSPI lost almost 2 percent of its value Tuesday on the news that some banks in China had stopped issuing new loans.
There are other negative factors that have pulled down the KOSPI over the past four days, such as uncertainties regarding U.S. economic policy, and the minor military spat between North and South Korea on the west coast. But none of these have scared investors away more than bad news from China.
The country has become South Korea's largest trading partner. Seoul piled up $33.8 billion surplus from trade with Beijing last year - almost two-thirds of its entire trade surplus.
Under the current structure, experts worry, an "ice age" could be awaiting the peninsula if the Chinese government revises its economic targets from growth to stabilization.
It is not only Koreans who are bracing for shocks from China. Unconvinced about its economic potential to keep growing at a dazzling rate, a Western pundit labeled any possible shock, "Dubai times 1,000, or worse."
His main concern was that its real estate and stock markets have been inflated by cheap loans from state-controlled banks, and these asset bubbles will burst whether or not the authoritarian government decides to stop the flow of easy money.
"Given the nature of the Chinese economy and given the rapid growth in its money supply, it may be difficult to avoid an asset price bubble from developing there. Clearly the policymakers will have to take some measures to limit the extent of the asset price bubble and they are about to do that," said Paul Sheard, chief global economist at Nomura Securities, during a press meeting in Seoul.
He added it was inevitable that the bubble will burst in the long run, and in a worst-case scenario, this could cause a collapse in domestic investment as well as have "a devastating effect on the economy of East Asia."
Another reason that Korean investors are vulnerable to China's economic performance is the attitude of foreign investors.
"Many foreigners tend to put South Korea and China in the same basket when they make investment decisions," said Jeong Young-sik of the Samsung Economic Research Institute.
This means that if the Chinese market loses its attraction to investors from wealthy nations, their policy may be to reduce investments in East Asia as a whole.
So without strong growth potential or a huge domestic market like China, Korea's woes could be deeper than its neighbor if that worst-case scenario becomes a reality.
cjs@koreatimes.co.kr
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