Korean financial firms suffer limited impact from Evergrande shock

A man walks past the entrance of the headquarters of China Evergrande Group in Hong Kong, Monday. AP-Yonhap

China's economic slowdown remains big fear factor for Korean economy

By Lee Min-hyung

Financial firms and institutional investors here appear to be exposed to minimal risk amid Evergrande's debt crisis, even as few of them turned out to have made direct investments into the Chinese real estate developer, data showed Wednesday.

Even if the possible default of Evergrande does not pose any serious threats to most financial firms here, including banks, insurers or securities companies in the short run, experts voiced the need for market players to remain vigilant over the issue due to the Korean economy's huge reliance on China.

The National Pension Service (NPS) is by far the biggest victim of botched investments in Evergrande, with the pension fund suffering a loss of 4.2 billion won ($3.52 million) after investing over 41 billion won since 2016, according to data released by Rep. Kim Sung-joo of the ruling Democratic Party of Korea.

Aside from the institutional investor, however, Korea's financial firms' combined exposure to the Evergrande crisis came in at only around 2 billion won, data released by Rep. Yoon Chang-hyun of the main opposition People Power Party showed. Exposure in finance refers to an amount of money that an investor could lose from an investment in particular assets.

But the Korean equity market still remains vulnerable to escalating jitters over the potential collapse of China's biggest property company. The benchmark KOSPI plunged 1.89 percent on Tuesday, hit hard by external uncertainties ― such as the U.S. debt ceiling and the Evergrande-sparked slowdown of China's economy.

The main bourse failed to defend the symbolic 3,000-mark for the first time in six months, which drove retail investors into a state of panic. Large-cap financial stocks have experienced a downward adjustment amid lingering uncertainties surrounding the external fear factors.

“If the Chinese economy slows down in the aftermath of the Evergrande crisis, we cannot rule out the possibility that emerging markets will be exposed to short-term shocks,” Hi Investment & Securities analyst Park Sang-hyun said. “The Korean economy and financial markets here cannot be free from the Evergrande risk in the short run due to the nation's huge economic reliance on China.”

Global investment banks are also revising down their forecast of China's economic growth outlook. Goldman Sachs recently cut the country's GDP growth forecast down to 7.8 percent this year from 8.2 percent, citing energy shortages there.

Bank of America also trimmed China's GDP growth forecast to 8 percent from 8.3 percent due to the Evergrande risk and COVID-19 fears.

Despite the looming fear of China's economic slowdown, the Korean economy remains resilient for the time being. The Bank of Korea maintains the country's GDP projection at 4 percent this year on solid exports despite a resurgence of the COVID-19 pandemic.

eBest Investment & Securities analyst Choi Kwang-hyuk pointed out that the Korean economy, however, should brace for a possible slowdown in post-pandemic recovery due to a declining monthly export growth rate.

According to data from the Ministry of Trade, Industry and Energy, Korea's exports rose 16.7 percent in September from the previous year. But export growth has been slowing. In April, exports rose 41.2 percent year-on-year and increased 45.6 percent the following month.

But the rate took a turn for the worse in June and came in at 39.7 percent. Even if exports in September set a record high at $55.83 billion, the weakening monthly growth rate remains a problem, according to the economist.

“It is hard for us to confidently say that the economy will be able to achieve additional growth in that the export growth rate has started to decline,” he said.

Expectations for the economy and stock indices have been at an overly high level, so the economy may enter a slowdown, according to the analyst.