Korea should respond properly to changes in Chinese economy

By Yu Byoung-gyu

The Chinese economy is set to turn toward recovery from the fourth quarter of 2012 thanks to the growing expectation of economic growth with the advent of the Xi Jinping government. The direction of the Chinese economy in 2013 can be looked at in five following areas. First, there exists the growing possibility of consumption recovery. Recently, consumption marginally recovered thanks to an increase in employment, rising wages, and price stabilization. The growth rate of retail sales in October 2012 rose to 14.5 percent from a year ago, up for three consecutive months, which helped consumer sentiment improve.

Second, investors also seemed to stop panicking. Not only did the slowed down pace of investment weaken in construction and facilities but also the purchasing managers’ index (PMI) rallied in October. The growth rate of the investment in fixed assets increased 20.7 percent in October from the same period of 2011, which marked an upturn for two successive months. The PMI also stood at 50.2 points, the first time it surged past the 50-point mark of late.

Third, there are strong signs of exports recovery. Although the exports business languished in the first half of 2012 due to the lingering economic downturn, exports rocketed 11.5 percent in October in a year-on-year basis compared to 9.9 percent in September.

Fourth, the implementation of easing monetary policy continues. As a result of the quantitative easing policies of lowering interest rate and cash reserve ratio, liquidity has been surging. In addition, the People’s Bank of China is taking measures to expand liquidity further.

Fifth, a growing number of experts expect that the effect of full-scale economy-stimulation will materialize thanks in no small part to the new government’s measures for economic boost. The size of China’s provincial business stimulation plan is estimated to be approximately 2 trillion yuan as of the second half of 2012, which is expected to underpin China’s national output. Furthermore, the next Chinese government’s economic policy is known to be friendly to the market while seeking stabilized and sustainable economic growth. Having bottomed-out, the Chinese economy is expected to achieve a growth rate of 8 percent plus in the first half of 2013. Therefore, the Korean economy needs to take appropriate steps to cope with the changing Chinese economy.

First, Korea should set up policies to adapt to the gradual recovery of Chinese economy. It is necessary to excavate and cultivate promising small- and medium-sized enterprises with competitive edge for export promotion rather than simply relying on multi-national companies.

Second, In the long run, strategy for diversification of export items should be prepared in line with Chinese domestic-demand-driven economic growth policies, and Korea should try to shift export items from traditional intermediate goods to consumption goods targeting Chinese domestic demand.

Third, as the Chinese government is employing economic policies to stimulate the economy throughout the nation until 2015, it is recommended that Korea should align policies to meet the existing Chinese investment strategy for each province. The 12th Five-Year Economic Development Plan which was launched in 2011 is set to be accelerated from 2013, focusing on mid-western and north-eastern China.

Lastly, it is recommended that Korea makes efforts to explore diversified export markets in emerging countries including Middle East, Russia, Central Asia, and South America.