Looming 'China risk' burdening Korean economy

The Korea Times

The Korea Times

Finance

Sat, September 30, 2023 | 21:39

Economy

Looming 'China risk' burdening Korean economy

Posted : 2021-09-29 16:30

Updated : 2021-09-30 10:07

A Chinese flag is seen on the top of a car near a coal-fired power plant in Harbin. Korea Times file

Tightening consumer sentiment in China to hurt Korea's exports

By Lee Kyung-min

The prospect of a much-awaited economic recovery is feared to be weighed down by recent risks brought on by electricity shortages in China, the largest trading partner of export-reliant Korea.

China's economic growth is expected to slow down sooner than expected due partly to a slowdown in construction and stringent new curbs on travel due to outbreak of the coronavirus Delta variant.

The grim assessment bodes ill for manufacturers in Korea where the fallout of the COVID-19 pandemic has been offset mostly by robust exports. Over a quarter, or 26.1 percent, of Korea's exports go to China. Semiconductors account for about a quarter of Korea's exports followed by automobiles and petrochemical products.

Seoul National University economist Lee In-ho said whether the electricity shortage would continue through the winter remains as the key factor determining how much of a decline in profits Korean firms operating in China will suffer.

"It is a bit early to say with certainty that the recent China risks will be far-reaching to the point where Korea's economy should reel uncontrollably as a result. But weakening consumer sentiment in the world's second-largest economy will hurt Korea's exports," he said.

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The global investment banking industry is lowering its growth forecast for China.

Morgan Stanley said China's gross domestic product (GDP) will dip 1 percentage point in the fourth quarter of this year, impacted by a 9 percent year-on-year decrease in steel production from September to December due to power outages as well as respective 7 percent and 29 percent reductions in aluminum and cement supply.

Nomura revised down its forecast for China's annual GDP growth for this year to 7.7 percent, down from 8.2 percent, last week, citing the impact of factories halting operations amid power outages and eco-friendly policies.

Economists at Nomura view that a surging number of factories across China are being forced to cease operations in recent weeks due to higher coal prices and government mandates on reducing carbon emissions.

Similarly, China International Capital Corp. (CICC) estimated the country's growth rate would decline between 0.1 and 0.15 percentage point in the latter half due to the electricity shortages. CICC said the shock will cause between a 4 percent and 4.5 percent drop in industrial output in September.

The rush in downward revisions to annual GDP forecasts and fourth-quarter output were driven by stringent measures to reduce electricity use in Jiangsu, Zhejiang and Guangdong provinces ― key economic powerhouses whose output decrease will lead to a below-50 reading in the Purchasing Managers Index, a key economic indicator set to be released this week.

The real crisis looming in the Chinese economy does not concern "Evergrande," the largest developer in China nearing default, but the power shortage, Hi Investment & Securities researcher Park Sang-hyun said, Wednesday.

"Market watchers expect the Chinese government to continue to push for a strong carbon-neutral policy ahead of the Beijing Winter Olympics scheduled from Feb. 4 to 20 next year, and this could significantly slow industrial activities," Park said.

Some provinces in China have taken measures to restrict electricity supply to aluminum producers, leading to a drop in facility operation and a subsequent decrease in the output of other metals such as zinc.

Aluminum production requires a large amount of coal-dependent electricity, a reason why the Communist state has curtailed production to a significant degree.

"China has tightened production regulations in line with a green initiative," he said. "The recent surge in the price of aluminum is explained in large part by production difficulties due to stricter environmental regulations, compounded by rising demand from eco-friendly industries including manufacturers of EVs and batteries."

lkm@koreatimes.co.kr