By Yoon Ja-young
The ratio of China in Korea’s investment portfolio is dropping sharply amid a slowdown of economic growth, rising costs and regulations in China.
According to the Federation of Korean Industries (FKI), China took 39.3 percent of Korea’s outward direct investments in 2005. The ratio, however, continued falling, marking 10.5 percent in 2015. That is only half the stake of the United States where 20.8 percent of Korea’s outward direct investments are headed.
Investments in China are decreasing in terms of ratio as well as net sum. Korea invested $2.85 billion in China in 2015, which compares with $5.15 billion in 2013 and $3.16 billion in 2014.
Korea is not the only country decreasing its Chinese investments. Foreign direct investment (FDI) to China decreased 6.8 percent in 2015, following a 7.8 percent drop in 2014. Japan, for instance, decreased its investments in China to $8.7 billion in 2015 from $13.4 billion in 2012. The United States’ investments in China also dipped to $7.3 billion in 2015 from $15.9 billion in 2008.
ASEAN, meanwhile, is rising as the new investment destination. Korea invested $4.16 billion in ASEAN countries last year, which is 1.5 times the investment in China. Vietnam was the top destination, with Korea’s investments there having increased by near 20 times since 2000. Samsung Electronics, for instance, built smartphone production facilities in Vietnam, and is scheduled to set up a consumer electronics complex in Ho Chi Minh. LG Display is also scheduled to produce LCD modules in its Vietnam complex.
FKI noted that the decreasing investments in China seem to be due to the slowdown of economic growth there coupled with decreasing favors for foreign investors and rising production costs. China carried out corporate tax reforms in 2008, which worked as a tax cut on local firms and a tax hike for foreign-invested firms. The country has also been continuously raising the minimum wage for better income distribution. Most Korean firms investing in China cited low production costs as the main reason for investments in the past.
“To flexibly cope with the global economic changes, there should be diversification of production sites to decrease investment risks,” said Song Won-geun, economic research chief at FKI.
“On top of investments in newly emerging economies such as ASEAN, the government should focus on improving the investment ecosystem here to attract Korean firms back to Korea,” he added.