China stock crash emerges threat to Korea

By Choi Kyong-ae

China’s tumbling stock market is adding woes to Korea’s economy already struggling with fallout from the Greek debt crisis and other uncertainties. Foreign investors are feared to exit from Korea and seek stable assets if China’s stock meltdown continues, analysts said Thursday.

The benchmark Korea Composite Stock Price Index (KOSPI) fell below the 2000 level during an intraday trading Thursday. It rebounded to end 0.6 percent higher at 2027.81 after plunging to 1983.78.

Analysts said that as Korea still falls into the “risk asset” category along with China, any major volatility in Chinese stocks has something to do with stocks in Korea.

“Whatever the reasons of a recent plunge in China’s stock market are, Korea is closely linked to China which is our biggest trading partner and in which Korean companies have increased their investment there. Investors here are getting a negative cue from China,”said LG Economic Research Institute economist Lee Cheol-yong.

In the past two to three days, China’s stock crash has had a bigger impact on KOSPI than the ongoing Greece debt crisis. Stocks which have benefited from demand from China fell sharply in recent sessions.

Amore Pacific whose ginseng-based cosmetics products are popular with Chinese tourists plunged 15 percent in the past four sessions through Thursday to 380,000 won.

Eugene Investment & Securities analyst Lee Sang-jae said, however, the broader KOSPI is unlikely to fall far below 2000 as China’s stock-market bailout announced over the weekend to prop up flagging stock prices won’t let the Shanghai Composite Index go down below 3,000.

After skyrocketing to nearly 5,200 last month from 2,000 points in July 2014, the Shanghai index continued to plunge, finishing just above 3,500 on Wednesday.

“It now remains to be seen whether the Greek government can come up with a progressive plan this week to regain its nearly collapsed financial health,” Lee at Eugene Securities said. “If Greece is kicked out of the eurozone in the so-called‘Grexit,’the KOSPI may fall to 1900.”

European leaders have asked Greece until the end of the weekend to reach an agreement with its creditors on belt-tightening terms in exchange for a new bailout plan, or face an exit from the eurozone.

Many economists say Grexit will have a wide range of impact on the global economy. But Bank of Korea Governor Lee Ju-yeol expected a limited impact from it on Korea’s economy due to its small exposure compared to other countries.

“A bubble collapse in China’s stock market will be greater than expected for Korea. Its trade volumes with China are so huge that stock crash in China will weigh down domestic spending there, which in turn Korean exports to China will be affected further,” Lee said Thursday after lowering this year’s growth outlook for Korea to 2.8 percent from an earlier 3.1 percent.