Moody’s Investors Service has picked South Korea as one of the few countries whose economies are seriously susceptible to the economic slowdown in China.
A local research institute has analyzed that a drop of 1 percentage point in the growth of China’s gross domestic product would slash Korea’s GDP growth by 0.6 percentage point.
The Chinese economy is markedly decelerating with its 2015 growth posting a 25-year low of 6.9 percent. Compared to a 10.4 percent GDP growth in 2010, its expansion has faced a bumpy road despite stimulus measures from its government.
Factors hampering the Asian superpower’s high-speed growth included inventory increases, mounting corporate debt and a real estate bubble.
Many global investment banks predict that a certain level of damage will be unavoidable. Further, some analysts say they don’t rule out the possibility of a hard-landing of the Chinese economy.
As for the Korean economy, the seriousness lies in the nation’s high trade dependency on China. Feasible risks from this heavy dependency has continued to come into the spotlight.
China accounts for about a quarter of Korea’s total exports. The world’s largest economy — based on purchasing power parity — is Korea’s No. 1 export destination.
After the 1997 Asian currency crisis, local manufacturers, including those in sectors like information technology and automobiles, were engaged in reckless competition to increase their market share there in the early 2000s.
Korea’s export shipments far exceeded those of Chinese products in quality and gained great popularity among consumers there. Seoul-based conglomerates rushed to the country to establish manufacturing bases. They hired locals to make the most of the country’s cheap labor costs.
But the business environment there is rapidly changing in the wake of growing payroll costs in major cities and competition from Beijing or Shanghai-based firms who are catching up in terms of product quality.
There is an urgent need for Korean firms to scale back their dependency on China and put more effort into diversifying their export destinations, which would involve emerging countries in South and Central America and Africa.
Simultaneously, enterprises should not underestimate Chinese manufacturing.
More and more South Koreans are replacing their iPhones and Samsung smartphones with Huawei and Xiaomi products. And Lenovo, Asus, Acer have already been established as good substitutes for Samsung and LG computers in the local market.
