Search All Site Content

Total Index: 5676 publications.

Subscribe to our Mailing List!

Sign up for our mailing list to keep up to date on all the latest developments.

The Peninsula

Three Reasons Why the ROK Should Temper Economic Expectations with China

Published November 14, 2012
Category: South Korea

By Seongjin James Ahn

With the presidential elections in the U.S. now over, South Korea has turned its attention to the political transition occurring in China.  This week the Chinese Communist Party (CCP) is set to reveal its new leadership roster for the next ten years, and regardless of who comes into power, South Korea – from an economic standpoint – will have much to conjecture given the uncertain economic outlook in China which is strongly linked to South Korea’s economy.  Despite the recent growth figures in China and the rosy rhetoric from its officials, Korea will need to temper its expectations and exercise patience in the short to medium term before it can optimistically rely upon China as an engine of growth the way it once did.

Chinese Growth Figures with a Grain of Salt

First and foremost, South Korea will have to take China’s recent economic growth figures with a grain of salt. Recent reports showed that China’s industrial and consumer indicators modestly strengthened; however, the analyses also revealed that the growth in economic activity has been primarily due to an expansion of credit via bank lending, which in turn has been used for domestic infrastructure projects.

Nowadays, one can never be too optimistic about growth in China that is driven by domestic investment – especially since government led investments by state banks can often result in the misallocation of capital, excess capacity, and non-performing loans.  Not to mention, the central government itself has been concerned about the heavy indebtedness of its local governments and, until recently, had put a pause on domestic investments in infrastructure for the aforementioned reasons.

These factors thus beg the question of whether China’s newfound momentum is truly sign of healthy growth or, to be cynical, a manipulation of policy resulting in inflated numbers to fabricate a façade of economic progress in the run up to the Communist Party’s 18th Congress; or perhaps it is an indication something else.  Therefore, given South Korea’s strong links to the Chinese economy and the dubious nature of China’s recent figures, it would be imprudent to hang one’s hat on the recent growth just yet. With China’s 12th five year plan in view, South Korea will have to wait and see how China’s new leaders will implement measures to restructure the economy and make it authentically robust for the medium to long term the future.

Data Undermines the Rhetoric

Secondly, South Korea should carefully measure its expectations in spite of Zhang Ping’s announcement on Saturday that China’s recent growth is attributable to a rebalancing of the economy. (Zhang is the chairman of the NDRC, the agency that coordinates China’s economic ministries.)  Given the vast size of the potential consumer market in China, there are many countries, including the U.S. and South Korea, which have in interest in seeing a rebalancing of China’s economy (i.e. a shift away from its current overdependence on exports and domestic infrastructure investment, and towards other measures that drive growth such as domestic consumption.)

However, according to a report in the New York Times, data indicates that Zhang’s words are misleading.  Not only has domestic investment recently increased in comparison to earlier in 2012, but China’s overall trade surplus has also soared in October to its highest levels in four years.  Moreover, independent economists such as Wang Tao at UBS find it difficult to “draw any reliable conclusions” as to whether China has actually managed to shift policies aimed at fundamentally rebalancing the economy and putting it on a more sustainable footing.

To date, as far as South Korea is concerned, China has primarily served as a manufacturing base of Korean goods for eventual exportation.  However, a rebalancing of China’s economy in combination with the prospective Korea-China bilateral trade agreement would result in substantial economic benefits for Korea.  It would mean that Korean businesses would be able to sell its products domestically within China without having to export its manufactured goods. However, as mentioned, convincing evidence for rebalancing in China is so far lacking and bilateral free trade negotiations only began this year in May.

Settling In and Sizing Up

The uncertain economic future between South Korea and China is also dependent on the pending new political leadership in Korea, as well as on the future dynamics between Washington, Beijing, and Seoul.  In the short to medium term, the new leaders in all three countries will be settling in (with new or revised policies) and sizing each other up.

In Washington, although Obama’s foreign policy towards China is more nuanced and moderate than that of his defeated opponent, the president will soon be faced with the important decision of selecting new Secretaries of State and Treasury.  In China, it will take time for the new leadership to successfully implement policies responding to the urgent domestic policy pressures (e.g. income disparity and social safety nets) and international policy criticisms (e.g. large trade surpluses and currency value), both of which will impact the way China’s economy will be managed.  In Korea’s case, a new president will be installed who will undoubtedly bring forth new policies that will impact the country’s political and economic interactions with both Beijing and Washington (e.g. Moon Jae-in’s foreign policy plans for an equidistant relationship between the two countries.)

In light of all the new variables and uncertainties in the following months, there is, unfortunately, not much that policymakers in South Korea can do in order to catalyze economic growth with China.  But they can, however, temper their expectations and focus on policies that in the meantime aim to diversify their own economy.

Seongjin James Ahn is a Visiting Fellow with the Korea Economic Institute. The views expressed here are his own. 

Photo from Korea.net’s photostream on flickr Creative Commons.

Return to the Peninsula

Stay Informed
Register to receive updates from KEI