Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
Can Korean economy withstand impact of China's economic risks?
The logo of China Evergrande Group is seen at its headquarters building in Shenzhen, Guangdong province, China September 26, 2021. REUTERS-Yonhap
By Anna J. Park
Gov't, analysts downplay concerns over spillover effects of China's property crisis
By Anna J. Park
China's deepening property crisis, coupled with growing fears of its economy heading toward deflation, is triggering concerns over spillover effects that could rattle the global economy and eventually affect the Korean economy.
Such jitters have only grown worse, as Evergrande, a giant Chinese property developer, filed for U.S. bankruptcy protection on Thursday, U.S. time.
Korean authorities and market experts have been keeping a close eye on the potential damage, but they expect the impact on the Korean economy to be limited, citing fundamental differences in China's banking and financial systems from those of other advanced capitalist markets.
The experts point out that China's banks have maintained stability during the first half, adding that the Chinese financial industry does not have any derivative products linked to real estate development projects.
A general view shows Evergrande residential buildings under construction in Guangzhou, in China's southern Guangdong province on July 18, 2022. AFP-Yonhap
Seung Yeon-ju, an expert on China strategy at Shinyoung Securities, explained that the filing of Evergrande's U.S. bankruptcy as well as the financial troubles facing Country Garden, China's biggest real estate developer, are matters already factored into the market, thus limiting the scope of negative contagion effects on the global economy.
“The current situation does not represent all Chinese property developers. The issue is largely limited to Evergrande, Country Garden, and a few other Chinese firms, whose default risks were already known and predicted by the market during the past years,” Seung told The Korea Times, Friday.
Furthermore, the analyst emphasized that the latest indices of the Chinese economy show that it has entered a recovery phase, after hitting the lowest point late last year. It is not highly likely that the current default crisis will spill over to the overall financial system, given fundamental differences of the Chinese banking system from other capitalist markets.
“It is true that the current Country Garden crisis could somewhat slow the recovery phase of the Chinese economy, especially domestic demand in the real estate market and household income levels. It means that China might experience a slower recovery in terms of GDP, but there's little possibility that the crisis would challenge the country's financial system,” the analyst explained.
“Not only Chinese banks or state-run financial institutions are expected to contain the crisis, Chinese banks' non-performing loan (NPL) ratio fell during the first half compared to last year. Also, China's financial system does not operate derivative products, meaning that the impact from the real estate default crisis on some firms are expected to be limited,” she added.
In this regard, the analyst explained that the bankruptcy filing by Evergrande in the U.S. is seen as the firm's effort to further delay payments of interest to foreign creditors, while protecting its assets overseas, rather than a desperate reflection of the firm's dire situation. What remains to be seen is how effective the Chinese government's measures will be in restructuring problematic firms of the wobbly real estate sector.
This aerial photo taken on Dec. 3, 2022 shows a housing complex built by Chinese property developer Evergrande in Huaian, in China's eastern Jiangsu province. Embattled Chinese property giant Evergrande Group filed for bankruptcy protection in the U.S., Thursday, a measure that protects its U.S. assets as it attempts to restructure. AFP-Yonhap
The analyst's take is largely shared by other market experts focusing on the Chinese economy.
“It is highly unlikely that the Chinese property risk might spread and become a systemic threat to the Korean financial markets, although it could serve as a psychological burden for local stock markets,” said Han Ji-young, an analyst at Kiwoom Securities.
KB Securities' analysts, Park Soo-hyun and Kim Seung-min, also forecast that the Chinese real estate crisis will not expand into an uncontrollable situation, given that a large portion of developers' debts were issued in the Chinese currency.
“The loss structure in this Chinese property crisis is not complex, as it is not linked to derivative products. Thus, it is not likely that the situation would develop into a Chinese version of the subprime mortgage crisis seen in the U.S. during the late 2000s,” the analysts said.
Vice Chairman Kim So-young of the Financial Services Commission (FSC), Korea's top financial regulator, also shares such a view.
“I think the possibility that the Chinese property crisis would significantly influence the Korean economy is very slim. Of course, the worsened global real estate outlook could negatively impact the real economy of Korea, which also could sway the financial markets. But the direct influence from it is expected to be relatively limited,” the vice chairman said during a press conference on Thursday.
Finance Minister Choo Kyung-ho vowed to closely monitor the market, keeping a vigilant eye on any negative influences of the Chinese property crisis. The finance ministry has formed a pan-government task force team on Sunday, comprising all related financial authorities and institutions, aiming to swiftly respond to signs of threat. The task force team maintains concerted efforts with Bank of Korea (BOA), FSC, Financial Supervisory Service (FSS), Korea Center for International Finance (KCIF) in monitoring the situation.
“Although it is expected a direct influence from China's property crisis will be very limited, the government is closely observing the situation,” Minister Choo said.
Korea's benchmark KOSPI fell about 4 percent this month, but closed at 2,508.80 points on Monday, up 0.17 percent from Friday. Stock market watchers do not expect the Chinese crisis to rattle the local stock market, considering the solid net profit growth of local corporations.
The won-dollar rate closed at 1,342.6 won per dollar Monday, up 4.3 from Friday. It is expected to move between the 1,300 won and 1,500 won range during the second half, due to risks from China's deflation and Europe's ongoing economic slowdown.