China's restructuring to hinder growth in Korea: KDI

By Yoon Ja-young

The Chinese economy is expected to go through restructuring for the time being, and this is likely to hinder growth here for a considerable time, the country’s leading economic think tank said, Monday.

The Korea Development Institute (KDI) noted in a report that uncertainties are rising in China ― while its economic growth rate is falling, volatility is increasing in financial markets.

“Behind the unstable Chinese economy is concern that it may plummet while restructuring excessive investments made to boost the economy during the global financial crisis,” said Kim Seong-tae, a fellow at the institute.

Kim noted that China had implemented massive fiscal expansion and monetary easing during the global financial crisis to absorb the shock from it, but that ended up in increasing debt.

“As a result, the ratio of investment to gross domestic product (GDP) soared to nearly 50 percent in China. A considerable part of the debt seems to be related to the overheated real estate market,” he said.

With the global economy seeing its growth potential falling, however, the excessive investments are having bad side effects, especially in the petrochemical, metal, construction and machinery sectors, which have led the high growth in China, he noted.

“We cannot exclude a hard-landing in China,” he said, pointing to its falling foreign exchange reserves. If that happens, it will be inevitable for Korea to be hit, as it relies heavily on China for exports.

According to the think tank, a one percentage point fall in China’s growth rate will pull Korea’s growth rate down by between 0.2 and 0.6 percentage points.

“The falling growth rate in China will slow down Korea’s exports, on top of deteriorating profitability of Korean businesses that have invested there,” he said. It will also hamper recovery in emerging Asian countries and natural resources exporters as well as developed economies, and all of this will affect Korea.

To compound this, industries such as aviation, electronics, machinery and chemicals, which heavily depend on exports to China, will be hit too. He said Korea should enhance its flexibility to effectively cope with the changes.

“The restructuring of insolvent companies and holding down soaring household debt must be started aggressively and soon to help improve the nation’s financial health,” Kim said.