Korea and China resembling Japan

By Yoon Ja-young

With China seeing a slowdown of its economic growth, concern is increasing over the Korean economy which relies on China for exports. Some analysts show concern that both Korea and China may be following in the footsteps of Japan.

At a seminar organized by the Korea Chamber of Commerce and Industry in the United States, economist Ken Goldstein of The Conference Board predicted the Chinese economy will grow by only an annual 3.7 percent this year and the next. The figure is much lower than the Chinese government’s 7 percent target this year, but he explained that his estimation, which is based on statistics not used by the Chinese government, is more reliable.

Though a hard landing isn’t likely, analysts generally agree that the era of China’s high growth rate is gone.

This could further pull down the growth rate of Korea, which fears that it may be following in the footsteps of Japan. Japan’s real GDP fell 0.2 percent in the third quarter from Q2, marking minus growth for two consecutive quarters.

Kim Yu-mi, an economist at BNK Securities, said Korea should accustom itself to a growth rate in the 2 percent range, as conditions aren’t favorable for exports which had previously been leading growth. “The problem is that it is difficult to expect a recovery of exports in the foreseeable future ― on top of the feeble global trade, it is especially burdensome for Korea as China is changing its export structure,” she said.

Previously, China imported medium goods to assemble and export them as finished products. Now, they are procuring the components by themselves without importing them. The ratio of such processing trade in China’s total trade fell to 35.4 percent in September from 55.8 percent around the end of the previous decade, the economist points out.

“As China rises in the value chain, it doesn’t have to depend on Korea to manufacture the final goods,” Kim said. “Even if China sees its exports pick up, it would be difficult for Korea to see its exports grow as much.”

Kim also points out that private consumption contributes to only 1 percentage point in Korea’s economic growth rate. “Even if it boosts the domestic consumption, it is structurally difficult to raise the GDP growth rate. Especially, the imbalance between the corporate and household sectors dampens recovery expectations,” she said.

Cho Dong-chul, a senior economist at the Korea Development Institute (KDI), said Korea is challenged by China in the export market just as Japan was chased by Korea. “There should be structural reform to maintain growth potential for the mid- to long term,” he said, calling for more flexibility in the labor market, corporate restructuring and deregulation.