Korea braces for China slowdown

China’s GDP estimated to fall to 7% level

By Kim Tong-hyung

China, the engine that drives global capitalism, has been plodding along slower. This has been triggering apocalyptic talk in economies like Korea, badly exposed as a one-trick pony as the slowdown spreads around the world.

The weak numbers in China seem to cause a more acute sense of urgency outside the country than within. The decision makers in Beijing look rather comfortable about annual gross domestic product (GDP) growth decelerating from double-digit pace to 7-8 percent levels.

Meanwhile, their counterparts in Seoul are losing sleep. The government’s announcement Monday to unleash a 5.9 trillion won (about $5.2 billion) stimulus package to combat stagnant growth points to growing concerns that the softening activity in the Middle Kingdom, coupled with a toxic Europe, could prove to be a blow to the country’s fragile recovery.

China has long replaced the United States as Korea’s most important trading partner. According to government figures, annual exports to China are equivalent to about 8 percent of an entire year’s GDP, which means that, aside of Taiwan and Malaysia, no economy is as dependent on China as Korea.

Analysis by the Hyundai Research Institute (HRI) suggests that a loss of a percentage point in China’s annual GDP growth will be enough to shave 0.4 point off Korea’s growth and its export growth by 1.7 points.

The pullback in Chinese growth may ensure that another downgrade to Korea’s growth estimates, which have been trimmed as frequently as nose hair in 2012, is inevitable.

Korea’s chances of meeting its annual growth target of 3.3 percent took a severe hit after the Bank of Korea (BOK) recently announced that GDP expanded 2.3 percent in the second quarter year-on-year, representing the slowest pace since the depths of the global financial crisis in 2009.

``The Korean economy’s reliance on the Chinese economy has grown significantly over the past two decades, so we are particularly vulnerable to a slowdown there. You have to say that the inevitable China risk has become a reality,’’ said senior HRI economist Ju Won.

The Chinese economy grew 7.6 percent year-on-year during the second period, 2.2 points off the pace it showed in the preceding quarter. According to the Korea Center for International Finance, 11 global investment banks put China's annual growth for this year at an average 7.9 percent in their analysis at the end of August, their estimate falling below 8 percent for the first time this year.

China’s imports dropped 2.6 percent in August from a year earlier, while exports increased just 2.7 percent, significantly lagging the double-digit growth rates the country has become accustomed to over the past decade. Much of the weakness owes to the precariousness in Europe, China’s largest trade market.

Its industrial activity grew 8.9 percent in August from a year earlier, the slowest since May 2009, while consumption grew by 13.2 percent, similar to the 13.1 percent shown a month earlier.

Korea’s exports of goods and services reached $555.2 billion last year and Chinese demand generated 24.2 percent of it, far above the U.S. proportion of 10.1 percent. However, Korea’s exports to China have been declining since March this year, down by as much as 5.6 percent year-on-year since the end of July to Aug. 20, according to recent government figures. The exports of petrochemicals, steel and machinery have been hit most severely, according to Korean government officials.

After the collapse of Lehman Brothers triggered the global crisis in 2008, it was the robustness of developing economies like China, and to a lesser extent Korea, that navigated the world economy out of the fire. But it now appears that the sluggishness in advanced economies like the U.S. and those in Europe are beginning to pull down developing economies with them to spread the slowdown wider across the globe and further postpone recovery.

It’s plain as a pikestaff that Korea must diversify its export markets as the Chinese economy, massive as it is, won’t expand as fast as it has been when it grows out of puberty.

``China has experienced a sky-high level of growth in the past few years, and it can’t possibly keep that up. If Korean firms are ill-prepared for this, then they will have a hard time surviving the increasingly cutthroat global market,’’ said Park Rae-jung, an economist from the LG Economic Research Institute.