By Kim Jae-won
Korea needs to follow the Japanese model in defusing its China risk by diversifying its investments to other emerging Asian markets, a private think tank stated in a report Sunday.
LG Economic Research Institute (LGERI) stated in a report that Japan has reduced its reliance on the Chinese market since 2010 by adopting the “China plus one” strategy, setting up an alternative investment destination in addition to the world’s second-largest economy.
However, the research center pointed out that Korean companies failed to diversify their investment destinations by focusing solely on the Chinese market, making them more vulnerable to risks from the neighboring country.
“Japanese corporations have changed their investment destinations from China to the Southeast Asian region and India under the strategy it calls China plus one,” LGERI senior researcher Lee Ji-pyeong said in a report.
“They worry that too much reliance on China will undermine their business.”
Lee said China was ranked third in investments by Japanese companies in a 2014 survey, which asked for the best country for doing business in for the next three years. Next were India and Indonesia. Japan Bank for International Cooperation conducted the survey.
The report said Japanese companies that invested in southern China had moved their production lines to Vietnam, the Philippines and Thailand in the early 2010s because wages for workers had increased in China.
Vietnam has taken China’s place as an alternative for a manufacturing base for Japanese firms thanks to its relatively cheap labor. Thailand is also popular with the Japanese for its infrastructure, such as well-established industrial complexes, convenient transport and stable electricity supplies.
Japan’s foreign direct investments (FDI) in China also dropped sharply to $6.74 billion in 2014 from $13.48 billion in 2012. The country’s FDI in Southeast Asia reached $20 billion in 2014.
Lee said political tensions between Japan and China also propelled Japanese companies to move their businesses elsewhere. The two Asian powers have been in dispute over a group of uninhabited islands, which it calls Senkaku, in the East China Sea. Japan is in control of them, but China claims they are part of its territories, calling them Diaoyu.
However, Korea’s economic reliance on China has increased over the past few years, and is exposed much more to risks from China. According to Korea International Trade Association data, China is the largest export destination for Korea, accounting for a quarter of exports so far this year.