The recent devaluation of the Chinese yuan, which followed a free fall in its stock market, showcased the uncertainties surrounding the world’s second-largest economy and more broadly, the global economy.
The storm from China is battering Korea and other emerging markets. The local currency and stock markets are still reeling from Beijing’s aggressive devaluation of the yuan. The currencies of emerging markets like Malaysia and Indonesia have fallen to their lowest level since 1997.
This is raising the specter of the 1997-98 Asian financial crisis since the crisis that began in Thailand and Korea was rooted in China’s depreciation of its currency in 1994, which touched off a currency war.
As such, talk of another crisis in September is gaining strength, all the more because the U.S. is poised to raise its key interest rate, which could result in rapid outflows of foreign funds from emerging markets.
Against this backdrop, it seems that Korean policymakers are too optimistic about the prospects for the Korean and global economy. One case in point is Finance Minister Choi Kyung-hwan, who said a weak yuan could help Korea, too, in that the nation exports many intermediary goods to China.
His optimism may also be based on the fact that the nation’s current account hit a surplus for the 40th straight month and that it has the world’s sixth-largest foreign exchange reserves, at $371.5 billion.
Economic players may well have a certain level of confidence, but too much optimism or complacency may curse us when the hard time comes.
A timely warning came from Oxford Economics, a U.K. advisory firm specializing in global forecasting and quantitative analysis: Korea’s exports, in heavy competition with China’s, would drop by 1.14 percent next year -- twice as much as the U.S., Japan and Germany -- if the yuan’s value falls by 10 percent. Korea’s growth rate would tumble by 0.9 percentage point.
Wouldn’t this be enough to awaken Choi and his economic policy team to the importance of monitoring local and global markets and working out contingency plans for various scenarios? The worst crises come without warning.