China has already become the largest trading partner for South Korea, edging out the United States and Japan. First of all, the burgeoning Korea-Chinese economic cooperation is evident in the two-way trade that surged to $140.9 billion last year from $6.3 billion in 1992 when the two countries established diplomatic relations. Now, a quarter of Korea’s total exports go to China.
Needless to say, the two nations have greatly benefitted from their mutually complementary economic structure. However, it is also true that there are growing concerns about Korea’s undue dependence on China. Seoul officials have sought to cut down on excessive reliance on foreign trade to better cope with external economic and financial shocks since the 1997-98 Asian crisis.
Ironically, however, the country has become more dependent on foreign trade despite a global economic crisis stemming from the 2008 housing debt woes in the United States. This is because Korea has shown a rapid recovery from the unprecedented global recession mainly thanks to booming exports. It is good to see the stronger-than-expected performance which has been envied by many other countries.
But now, we must not miss an important point that such an export-oriented economic structure may turn against Korea as its sustainability is called into question. It is not desirable for policymakers to keep shouting hollow slogans of beefing up the local services sectors to reduce the increasing weight of exports on economic growth.
Getting back to the issue of China, it is worth noting that the rising economic power has increased its purchase of Korean securities. China bought 2.9 trillion won ($2.5 billion) of Korean bonds, mostly state bonds, in the January-August period, accounting for 17.2 percent of total foreign investment in local bonds. This indicates that China has emerged as one of big buyers in the local bond market.
The purchase is certainly a positive sign that the Chinese see the Korean economy from a good perspective. It is also part of Beijing’s efforts to diversify the portfolio of its vast foreign exchange reserves estimated at $2.4 trillion as the U.S. dollar remains weak against the Japanese yen and other currencies. In the eyes of the Chinese, Korean bonds are attractive as they are safe to invest in and offer a stable yield.
The influx of Chinese money is a boon to Korea. But, it may become a destabilizing factor to the Korean economy if it continues to rise. It could add to the pressure on the Korean won’s appreciation, adversely affecting export industries. And the nation might be forced into a dominant yuan economic bloc some day.
To avoid such plausible negative effects, Korean policymakers and businesses should prepare themselves to avoid undue dependence on foreign trade or an excessive influx of foreign funds from a certain country or a group of investors. This is also necessary to help minimize the fallout of a looming U.S. currency war with China and Japan.