The alarm is sounding for the Korean economy as the continuing eurozone debt crisis has begun to spill over to China, the engine of global economic growth and the largest market for Korean exports.
Last week, China announced that its economy grew 7.6 percent in the second quarter of this year, a sharp decline from 9.5 percent a year earlier.
The growth figure was the lowest since the world’s second-largest economy grew 6.6 percent in the first quarter of 2009 at the height of the global financial crisis.
The plunge in economic growth further fueled fears of an economic hard landing in China. Worries about China’s economy surfaced in the first quarter of the year when its GDP growth tumbled to 8.1 percent from 9.7 percent a year earlier and 8.9 percent in the preceding quarter.
China’s slowing economy is cause for grave concern among Korean policymakers and exporters, as the neighboring economic powerhouse accounts for about one-quarter of Korea’s exports.
According to Hyundai Research Institute, a 1 percent drop in China’s GDP growth would knock 1.7 percentage points off Korea’s export growth and 0.4 percentage points off Korea’s economic growth.
China’s influences on the Korean economy are even greater, as major emerging economies, such as Brazil, India and Russia, all depend heavily upon China for their economic growth.
For instance, India’s exports to China grew 12 percent last year but plummeted to negative 10 percent growth this year, pulling down its economic growth in the first quarter to 5.3 percent, the lowest in nine years.
Brazil experienced a similar dramatic change on its export front. The country witnessed a 33 percent jump in the first half of last year. But exports grew a mere 0.9 percent this year, due largely to a drop in shipments to China.
All this illustrates the need for Korean companies to closely monitor China’s economy to mitigate their vulnerability.
China’s sharp economic downturn in recent months is in large part attributable to the worsening debt crisis in Europe, its largest market, and a sluggish recovery of the U.S. economy.
Yet it is also at least partially the result of the Chinese government’s efforts to shift from export-oriented growth to consumption-based growth. This transition implies slower economic growth as China will no longer pursue the hectic export and investment growth of previous decades. In a word, the boom years in China have come to an end.
Going forward, China will focus on expanding domestic consumption, which currently accounts for close to half of its GDP. To boost consumption, Beijing will lower taxes on consumer and luxury goods, accelerate income distribution reform and implement policies aimed at boosting real household income.
As a result of these efforts, China will be transformed from the “factory of the world” to the “market of the world.” It is forecast to surge past the United States to become the world’s largest import market in 2016.
Korean companies need to adapt to this sea change. In the first place, they need to reduce their reliance on China. Korea’s exports to China have already begun to fall. Korean exporters need to explore new markets that can take up the slack in exports to China.
Companies operating in China need to change their trade pattern. At present, about half of Korea’s exports to China are intermediate goods, which are assembled in China for re-exporting to third countries.
But this type of processing trade is no longer welcomed by China as the country is seeking to advance its industrial structure. Korean companies need to target China’s domestic market with high-end consumption goods, such as cosmetics, clothing, autos and mobile phones.
Korean companies also need to tap into the expected growth in China’s demand for services, such as health care, tourism, education, logistics and finance. Currently, service industries account for 43 percent of China’s GDP, a much lower proportion than in advanced markets. This means these sectors have much room for expansion.
To preempt China’s expanding market and create new business opportunities, Korea needs to conclude a free trade agreement with China as early as possible. An FTA will boost the price competitiveness of Korean products, especially those from small and medium-sized companies.