By Cho Jin-seo
Korea’s economic dependence on China has grown so fast that more than half of its economic growth since 2008 is attributable to the increase in exports to Beijing, a report from a government think tank showed Tuesday.
Any minor change in China’s economic policy could shake Korea’s industrial base hard, especially firms in the electronics, chemicals and energy sectors, the Korea Institute for Industrial Economics and Trade warned.
South Korea’s gross domestic product has grown 4.2 percent from 2008 up to the first half of this year. Of this, 2.2 percentage points were derived from increased exports to China, said Kang Doo-yong of the institute.
China is by far the largest trading partner of Korea. Its portion as the export destination for Korean goods increased from 27 percent before the financial crisis to 31 percent now.
Economic links are likely to become so strong that the dependency could be fatal to Korea’s relatively small economy.
“The Chinese economy may continue its fast growth. A Korea-China free trade agreement will possibly strengthen Korea’s dependence on China. Efforts should be made in order to reduce the risk of fluctuations in the Chinese economy,” Kang said.
The rise of China in the global economy is not news but for Korea the impact is apparent. China’s share of world manufacturing production has grown from below 5 percent in 1995 to almost 20 percent this year. Many Chinese firms buy components from Korean firms such as Samsung and Hynix, as well as from smaller firms.
Some sectors cannot live without China, literally. The country buys more than half of Korean exports of plastic fibers (83 percent), petroleum products (73 percent), display manufacturing machinery (62 percent), batteries (58 percent) and flat-screen displays (55 percent).
Market analysts warn that there may be a supply glut for many of those items in China. A further worry is Beijing’s move to tighten its fiscal and monetary policy.
The People’s Bank of China, the central bank, recently announced that it would raise reserve ratios for banks by 0.5 percentage points, for the fifth time this year. The communist party government, under international pressure on its trade surplus, has lowered its annual growth target for the next five years to 7 percent, which will have an impact equivalent to a “crash landing” in other slow-growing economies.
China has also become a major factor in the Korean stock market. While the European market’s influence is becoming weaker, the Chinese government’s policy has clearly affected investors’ confidence in Korea since October, said a report from KB Investment & Securities.