South Korea’s recent free trade deal with China was not all good news, experts said, warning that the nation’s reliance on the Chinese economy would rise to excessive levels.

Earlier this year, Korea and China agreed to allow direct trading between the won and yuan starting in December to encourage Korean businesses to trade in the Chinese currency.

And now, the two sides have signed a historic free trade agreement that will eliminate tariffs on key bilateral export items.

A stronger relationship with the world’s second-largest economy is expected to benefit Korea’s export-driven economy, but industry watchers believe heavier reliance on China means the nation is exposed to bigger risks involving a hard landing for the Chinese economy. 

“Both the trade deal and the direct trading market can be considered double-edged swords for the Korean economy,” said Han Jae-jin, a researcher on the Chinese economy at Hyundai Research Institute.

“Korea’s weakening manufacturing industry can benefit from the huge (Chinese) market but, at the same time, it could face a bigger risk of relying more heavily on an economy whose growth has begun to witness a slowdown,” Han said.

Exports from Korea’s top 38 companies to China rose 35 percent over the last two years, from 108 trillion won ($98 billion) in 2011 to 145 trillion won in 2013, according to local research firm CEO Score.

The free trade deal and the direct trading market are expected to lead to further increases in the figures, industry watchers said.

“If China’s economic growth rate drops by 1 percent, Korea’s economic growth will also fall 0.17 percent,” said state-run Korea Development Institute in a report, as over 84 percent of Korea’s exports to China are directly linked to Chinese demand.

To cushion the impact, the economy needs to diversify its export strategies, market watchers said.

KDI suggested that Korea make an effort to break into new emerging markets as China’s economy may not continue to see high growth.

Others said Korea should become more strategic by continuing to rely on China while shifting its focus to industries with more growth potential.

“The nation should reduce its exposure to China’s steel, chemical, shipbuilding and machinery industries, which have been sluggish due to an oversupply. It is time now to pay closer attention to other growing markets such as information technology, clothing and consumer goods,” said Jeon Byeong-seo, a professor at Kyung Hee University.

By Shin Ji-hye (shinjh@heraldcorp.com)