China risk

Korean economy should be in emergency mode

China slashed its 2012 growth rate to 7.5 percent, a recession by the Chinese standard and the lowest in 13 years. The slowdown will also have a ripple effect on the Korean economy, which ships 29.8 percent of its exports to the neighboring country. Korea needs to diversify its export markets and stimulate domestic demand.

This year appears to be China’s turning point after decades of double-digit growth. The world’s second largest economy has regarded the 8 percent growth rate as a must for absorbing 7-8 million new workers each year. Even in the 2009 global economic crisis, its economy grew by 9.2 percent. Over the past decade, China’s economy has quadrupled. However, the high-growth policy has widened the income gap and degraded the environment. Beijing plans to prioritize price stability over growth.

It is premature to conclude that the Chinese economy will make a hard landing. What is clear is that China’s economy will no longer grow as fast as it has been.

The ripple effect will be widespread. It will surely contract the global economy at a time when the world’s two other major economic engines ― the United States and the European Union ― are in stagnancy. This is troublesome for Korea, the world’s seventh largest exporter and the ninth largest trading country. Korea also could cushion the global economic crisis in 2008-2009 mostly thanks to the robust growth in China. Much of Korea’s trade surplus came from China, which is Korea’s No. 1 destination for global direct investment. Thirty-five percent of Korea’s global direct investment went to China.

A report shows that Korea’s economy and exports will contract by 0.4 and 1.7 points, respectively, per a 1-point reduction in China’s growth rate. For the first two months of this year, exports to China grew 4 percent, more than three times as slow as the 14.8 percent in the same period last year.

The Bank of Korea may slash its growth projection of 3.7 percent this year.

The Korean economy is beset with a triple whammy of high oil prices, high inflation and high exchange rates. The government has few policy tools to solve the woes. Slashing oil tax will reduce tax revenue. Currency depreciation will further fan inflation although its effect of boosting exports is questionable.

An economic contraction will slash growth in income and jobs and complicate households’ ability to repay record debts. Compounding the economic woe is inertia of the government ahead of the parliamentary and presidential elections this year.

It is difficult to increase the welfare budget amid slow growth. Political parties must be prudent in welfare pledges. The government must seek ways of boosting domestic demand to offset the contraction in exports.

Exporters should set their eyes beyond China to penetrate emerging economies. Politicians should stop politicizing free trade agreements. Policymakers must chart programs to power the economy at least to the potential growth rate ― optimal economic growth without incurring inflationary pressure ― of 4.5 percent. <Korea Times>

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