There is a saying, "If China coughs, Korea suffers from a bad cold.'' The recent situation involving Asia's largest and fourth-largest economies makes this adage seem even more convincing.
Worries about the Chinese economy are growing as its debt woes deepen amid slower production, investment and consumption. This week, Xingrun Real Estate, a property developer in Fenghua, Zhejiang Province, defaulted on 3.5 billion yuan ($625 million) in maturing debt.
Corporate defaults have hit the world's second-largest economy recently, but the collapse of Xingrun comes as more of a shock as it could be a harbinger of America's subprime mortgage crisis. True, China is reportedly facing the worst property bust after years of speculative real estate investment.
A string of "ghost towns'' has cropped up across the country as developers have built homes and buildings with loans they secured through the shadow banking system ― a vast network of lending outside formal channels and beyond the reach of regulators.
China's real economy is also losing growth momentum, with indicators showing lower-than-expected results. Industrial output in January and February rose at its slowest pace in five years, and retail sales gained 11.8 percent in the two months from the year before, the lowest since an 11.6 percent rise in February 2011. In February, exports posted an alarming 18.1-percent decline.
Of course, there's no need to be so sensitive about China's economic plight, given the prevailing view that the latest defaults are seen as China's intended move to dispose of marginalized companies. In fact, Chinese Premier Lee Keqiang said at the close of the annual session of the National People's Congress last week that Beijing was willing to accept some debt defaults in what appears to be a move aimed at cleaning up its poorly regulated shadow banking sector.
But this is certainly no time for complacency, considering that China's corporate debt amounted to 65 trillion yuan as of the end of 2012 ― 125 percent its gross domestic product ― as a result of debt-reliant business expansion. A pessimistic scenario says China's shadow banking problems are so serious that the world's most populous country should endure restructuring and low growth at least for five years.
Needless to say, China's economic crisis has significant implications for Korea, which exports more than one-fourth of its merchandise to China. So much so that Moody's Investors Service warned that the biggest risk for the Korean economy would be China's growth slowdown, rather than the U.S. Fed's impending tapering of monetary stimulus.
Our policymakers need to keep a close watch on China affairs and map out preemptive measures to brace for the worst. It is also necessary to revitalize domestic markets and diversify export markets.
Worries about the Chinese economy are growing as its debt woes deepen amid slower production, investment and consumption. This week, Xingrun Real Estate, a property developer in Fenghua, Zhejiang Province, defaulted on 3.5 billion yuan ($625 million) in maturing debt.
Corporate defaults have hit the world's second-largest economy recently, but the collapse of Xingrun comes as more of a shock as it could be a harbinger of America's subprime mortgage crisis. True, China is reportedly facing the worst property bust after years of speculative real estate investment.
A string of "ghost towns'' has cropped up across the country as developers have built homes and buildings with loans they secured through the shadow banking system ― a vast network of lending outside formal channels and beyond the reach of regulators.
China's real economy is also losing growth momentum, with indicators showing lower-than-expected results. Industrial output in January and February rose at its slowest pace in five years, and retail sales gained 11.8 percent in the two months from the year before, the lowest since an 11.6 percent rise in February 2011. In February, exports posted an alarming 18.1-percent decline.
Of course, there's no need to be so sensitive about China's economic plight, given the prevailing view that the latest defaults are seen as China's intended move to dispose of marginalized companies. In fact, Chinese Premier Lee Keqiang said at the close of the annual session of the National People's Congress last week that Beijing was willing to accept some debt defaults in what appears to be a move aimed at cleaning up its poorly regulated shadow banking sector.
But this is certainly no time for complacency, considering that China's corporate debt amounted to 65 trillion yuan as of the end of 2012 ― 125 percent its gross domestic product ― as a result of debt-reliant business expansion. A pessimistic scenario says China's shadow banking problems are so serious that the world's most populous country should endure restructuring and low growth at least for five years.
Needless to say, China's economic crisis has significant implications for Korea, which exports more than one-fourth of its merchandise to China. So much so that Moody's Investors Service warned that the biggest risk for the Korean economy would be China's growth slowdown, rather than the U.S. Fed's impending tapering of monetary stimulus.
Our policymakers need to keep a close watch on China affairs and map out preemptive measures to brace for the worst. It is also necessary to revitalize domestic markets and diversify export markets.
