Koreans Jittery About China’s Post-Olympic Economic Hangover
By Sunny Lee
Korea Times Correspondent
BEIJING ― With the Beijing Olympics half way through, pundits are busy reading their own oracles about how China's seemingly unstoppable economy will look like after the Middle Kingdom completes the most expensive Olympics ever staged.
Koreans too. China is Korea's largest export destination as well as its largest trading partner. When something affects China Inc, the Korean economy also stands to experience a domino effect. And the prediction is not very promising.
"There is nothing positive for Korean companies," Park Seung-ho (Sam), president of Samsung Economic Research Institute (SERI) in China, told The Korea Times.
There are many concerns over the post-Olympic Chinese economy, according to Park. "Firstly, there is the obvious post-Olympic down-investment cycle coming up. This may not be a big concern because the Olympics cover only the capital city."
Park, however, pointed out that there are a slew of other negative things happening this year in the Chinese economy that are not related to the Olympics. "There is on-going inflation, which is expected to continue after the Olympics. The Chinese government's tightening policy to curb inflation and market liquidity for the last two years, in which it has increased the bank's reserve ratio as many as 18 times, begins to have a serious impact on the Chinese economy. For example, many small- and medium-sized companies (SMEs) have been heavily affected because of tight cash flow. Tens and thousands of them went down," he said.
The Chinese government is clearly feeling that heat. On Monday, the central bank, Ministry of Finance, Ministry of Human Resources and Social Security, issued a joint circular to call for more job creation by supporting SMEs. China's unemployment rate in May hit 5.5 percent, a new record high for the past three-year period.
SMEs in China provide more than three quarters of urban employment opportunities.
On Wednesday, the Communist Party mouthpiece China Daily also acknowledged its concern in its editorial. "The combination of macroeconomic control at home and a slowdown of the global economy has exacerbated the problem to the extent that risks the loss of many jobs."
Although China may be able to tackle the issue through policy adjustment and relieve the unemployment problem to a certain extent, mere financial support would not help much because Chinese unemployment is caused by the economic cycle and structural problems.
Park also pointed out the rising input cost, not just in energy and utilities, but also in the consumption side amid intensified inflationary pressure and tightening policy have also dampened consumption appetite.
Then, there is the problem of hot money, which is indeed a very big issue among economists. Speculators initially expected a higher appreciation of the Chinese currency, yuan, since the end of last year. But that didn't happen. The Chinese government has been appreciating its currency, but not as fast as speculators had expected. Thus, with the Olympic effect weaning out, the money will go out of the country.
"So, during the second half of this year, there will be an exodus of hot money that will create huge confusion and concern. And it will be a very sensitive time for the Chinese economy. I expect the Chinese economy will go through a more negative stretch in the second half period," Park said.
Isaac Meng, an analyst at BNP Paribas in Beijing, echoes the view. "The slowdown of the Chinese economy is something that started last year. We're going to continue to see slower growth. There's no question about it," he told The Korea Times.
Amid all this, Park worries that Korean companies will suffer more. "This has been the same on-going trend for the last two or three years in which Korean companies have been squeezed hard. They will be more so this year," he said.
Up until recently, the general consensus of economists, both Chinese and foreign, has been that China will continue its stellar economic growth after the Olympics because of the scale and potential of the Chinese economy ― the fourth largest in the world.
Optimists also pointed out the fact that China's $40 billion in Olympics-related spending in the years leading up to the Games, accounts for an average of only 0.3 percent of China's total GDP each year, in an apparent effort to downplay the significance of the Olympic expenditure and its strain on the nation's economy.
"However, as of late, pessimism has grown," said Pyo Min-chan, a Samsung economist. "A considerable number of economists now predict that the post-Olympics economy may suffer a debilitating slowdown as externalities caused by breakneck growth come to light one after another," he said, pointing out the much-moderated growth to 10 percent from last year's peak of 12.6 percent. Economists see that that figure will further go down after the Games.
What does all this mean to Korean companies? Bad news, again.
"Korean companies are in a tighter situation. For example, China has recently tightened regulations for OEM, export and import. There are also the issues of rising costs and competition from Chinese companies. These are all hard for Korean companies," Park said.
He pointed out that the only solution for Korean companies is for them to be more competitive. "The Chinese market itself has been getting more competitive while the profit margin becomes narrower. Korean companies should be more cost-effective, manage their cash flow well."
At the same time, Park said Korea's traditional China strategy, that is, low-tech, export-oriented operations using cheap local input, won't be able to survive in China. In fact, the Chinese government doesn't welcome these companies any more. With an elevated economic status, China now wants to host high-tech, environmentally friendly foreign companies.
Another particular concern for Korean companies is restricted human flow, due to tightened visa regulations China placed before the Olympics. The airline companies felt the heat first.
"I would estimate about a 20 to 30 percent drop in passengers, compared with the previous year," said Kim Hyoung-gyun, president of Kumho Asiana Group in China. Kim cited visa restrictions, Olympic security concerns, and difficulty in obtaining Olympic tickets as the reasons for the reduction.
"I hope the demand will rebound after the Olympics," he said. However, he is uncertain whether China will ease the rules regarding multiple-entry visas, necessary for business people.
With the expected slowdown of the Chinese economy, SERI in a recent report lowered Korea's economic growth grate from the initial 4.6 percent to 3.8 percent for the second half of this year, citing moderation of exports among other factors. China, being Korea's largest export destination, takes over 20 percent of its global export total.
After hosting an Olympics, some countries were plagued by a post-Olympic economic hangover, called "Valley Effect" or "V-low Effect."
The phenomenon is primarily caused by a whopping investment drive at the pre-Olympic stage, accompanied by a boom in consumption and revenue. But the investment and consumption plummet when the global festival is over. At that time, the host city would have to shoulder the heavy burden of maintaining idle sports facilities.
Amid some negative assessment on China's post-Olympic economy, China itself is engaging in a vigorous public sentiment campaign to calm down the woes Chinese people and foreign investors have on the nation's economic prospect.
China's officials have been reassuring that China will not suffer from a post-Olympic bust, citing that China's sheer size of economy with which the Olympics are relatively a small factor as well as its future growth potential based on the momentum it has shown for years, will march forward.
"The Olympic Games won't be a watershed for China's economic growth," Wang Yiming, vice president of the Academy of Macroeconomic Research, saids. The institution is affiliated to the National Development and Reform Commission, the country's top economic planning body.
For China, the economic growth carries a particular political significance because the Communist Party has traded on its ability to deliver economic growth to subdue demands for political change.
The Chinese media have also carried stories pointing to a slowdown, but they have tended to follow the official line of keeping bad news out of the press during the Olympic Games.
But there is still room for optimism. "Indeed, there are some challenges. The property market adjustment is still going on. The global demand continues to be weakened. Housing is a big challenge. Export is a big challenge. Energy price regulation is a major problem. We still have a fuel shortage due to price control. How the government is gradually fazing out the energy subsidy and increasing the energy price, without causing a major impact on the economy, is quite a challenge," said Meng, adding, however, "It's far from a crisis mode," pointing out China's extremely good fiscal condition, which, he believes, can stimulate the domestic demand.
That's something other economists more or less agree on. China will still grow, they nod their heads, if China overcomes all these obstacles.