China Factor to Boost Korea’s Economic Recovery
By Yoon Ja-young
Staff Reporter
South Korea is expected to enjoy a robust economic growth this year by capitalizing on rising demand from China for capital and investment goods, Societe Generale's economists said in an interview with The Korea Times.
Glenn Maguire, chief Asia economist at the global investment bank, said that China is shifting the focus of its economic policies to boosting domestic demand through infrastructure projects, with most of its export destinations in a slump in the wake of the global financial crisis.
``As China is moving from an external demand focus model to a domestic demand focus model and targeting very strong growth in infrastructure and investment, it is importing a lot of these capital and investment goods,'' he said, adding that Korea is definitely one of those ``China Five'' beneficiaries, along with Taiwan, Japan, Australia and Brazil.
He noted new drives of growth emerging from Asia. He cited mass production of very cheap cars in China and India, and the rise of consumers with purchasing power emerging from several years of income growth.
``This is very important dynamic for the rest of Asia,'' he said. ``Though the end product of cars is very differentiated and specialized, there are a lot of generic components. And the Asia supply chain has been able to redirect quickly to this new emerging dynamic.''
On top of the emergence of Asian consumers, he cited the extraordinary stimulus measures in China as another important driver for growth in the region.
He said China will reevaluate its currency around the second quarter, as imports are growing much faster than exports. ``The benefit of altering the exchange rate by making imports cheaper would actually outweigh the cost of making exports slightly less competitive,'' adding that China's exports are not very exchange rate sensitive while China is a price taker for imports such as energy and other commodities.
``If China revaluates its currency, it will make imports cheaper. That will be beneficial to economies where China is importing from,'' he said.
Korea, of course, would gain. He said that the increase of Korea's exports to China was one of the first signs that the global economy was recovering in 2009.
Strong Won
He expected the Korean won to strengthen, on strong economic growth forecasts. Societe Generale expects the won to reach 900 won per dollar in 12 months. As all currencies in Asia are rising together, and because Asia is trading more with each other, there shouldn't be the same resistance from Asian policymakers to intervene. The strong Korean won will not come as a loss of competitiveness.
He added that among the significant capital inflow into Asia due to booming China, some investors prefer to invest in China indirectly due to transparency problems with the market. Korea could be their alternative choice.
He said that as the inflation in Asia is at reasonably high level, the region should be looking to start policy tightening. Socite Generale expects Korea to hike its key rate to 2.25 percent around September.
Regarding the fate of the U.S. dollar and the euro, Michala Marcussen, head of global economics at Societe Generale, said that one should begin by looking at how the global economy would evolve.
She pointed out that there was a long period of dollar depreciation following World War II. ``The role of the U.S. dollar in the global monetary system will decline, but it's been a very slow process,'' she said, adding that SDR as the global currency is not a viable solution, at least not anytime soon, and going back to the gold standard is not a stable system.
Regarding concerns raised by global analysts over the euro, she said it has no reason to collapse despite difficulties. ``If the euro crashes the problems will be even greater. There is no reason to choose that,'' she said.
``The euro won't collapse automatically - It's a political choice that would be very painful.''