INTERVIEW Chinese economy at growing risk of hard landing

'China's risk is massive for the world but even more so for Korea'

By Lee Kyung-min

Korea should brace for a looming crisis from China in light of the latter's recent “dismal” 6.6 percent growth rate in 2018, the slowest in 28 years since 1990, according to global economists.

Following the disappointing GDP figure, analysts are split over whether the world's second-largest economy will undergo a “hard landing,” which many worry will send a shudder through the global economy and financial markets.

The economists warned that the fast slowdown in China will pose a major risk to Korea which has a small, open and export-reliant economy.

“Korea should be worried,” said Antonio Fatas, an economics professor at INSEAD.

“Trade between the two countries is large and the region is very much dependent on China. China dominates the dynamics of the Asian region. The more global the crisis, the worse the outcome for Korea.”

According to data from the Korea International Trade Association (KITA), exports accounted for 36.3 percent of Korea's GDP in 2018.

Korea came third in the list of countries relying heavily on exports following Germany with 39.2 percent and the Netherlands with a whopping 78.9 percent.

Over a quarter of exports, or 26.8 percent, were made for export to China.

Experts believe the development of the ongoing trade feud between the U.S. and China will determine the future course of the Chinese economy.

“Some economists estimate the Chinese economy has stopped growing. Most likely, though, the official numbers will show a soft landing,” said Sohn Sung-won, professor of economics at California State University-Channel Islands.

“How hard China lands will depend upon the outcome of the trade friction with the United States. If continued, a hard landing for China is not out of the question.”

Fatas said China's economy could be in worse footing than it looks as the data is not as “precise” as it should be.

“China is slowing down probably faster than the official statistics. It is a combination of the attempt by the government to rebalance the economy which is not working as expected and the consequences of the trade war the U.S. started. It is likely this will persist in the near term.”

The situation could get worse, with the possibility of a soft landing still lingering, he added.

“In the coming years, growth will decelerate faster. If the world economy continues growing, it is possible we will see a soft landing. If we see a global crisis, it will be much harder for China to engineer a soft landing.”

However, some economists disagreed.

Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis, thinks chances are low that China will undergo an economic crisis.

“I doubt it since China still has instruments to avoid it. Not only does China still have monetary and fiscal space but also massive control of the economy as shown by the ongoing measures to force banks to lend to the private sector,” she said.

“Growth in China may rather be around 3 percent and the reason is that the return on assets due to excessive investment and misallocation of resources continues. The mirror of this situation, namely leverage, will also drag down the Chinese economy.”

Korea, major victim

Experts said that regardless of China suffering a hard landing, Korea's economy will be severely affected by China slowdown given its exports will be less of a support to broader local demand to China in 2019.

“China's economy is a critical stimulant of global growth. Korea's economy is heavily exposed to China's economic performance via its important export and manufacturing sectors. Global demand looks to have passed its peak,” said Katrina Ell, an economist at Moody's Analytics.

This is in line with a broader consensus reached by many international organizations and global investment banks.

JPMorgan Chase made a projection in 2018 that if China's growth rate dips by 1 percentage point, that of Korea will also decrease by half of a percentage point.

The risk of China's economy facing a hard landing is elevated, while it will endure a managed slowdown and ultimately avoid a hard landing, Ell added.

“China faces its most vulnerable window of growth since the global financial crisis. But the country will avoid a hard landing as policymakers have numerous levers at their disposal and so far have only taken a measured approach to releasing stimulus in the economy.”

The People's Bank of China (PBOC) injected a net 560 billion yuan (91 trillion won) into the economy, Jan 16.

“China's risk is massive for Korea notwithstanding the FTA with the US. China's risk is massive for the world but even more so for Korea,” Garcia-Herrero said.

However, Mauro F. Guillen, director of Lauder Institute at Wharton School, said the implications for Korea don't have to be severe if China finally makes the transition from export-led growth to domestic growth.

“The problem is that no economy has ever grown by more than 4 to 5 percent forever. There are business cycles and growth in general comes down as economies mature. The Chinese need to save less and spend more. It's as easy as that.”