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(EDITORIAL from Korea Times on Jan. 20)

All News 06:59 January 20, 2022

Growing China risk
Korea needs to diversify export markets

South Korea is likely to bear the brunt of China's expected economic slowdown this year, raising the need to reduce its undue dependence on the world's second-largest economy. The question now is how to minimize the fallout from the growing China risk.

The Chinese economy expanded 8.1 percent year-on-year in 2021, which was ostensibly a solid rate of growth. But it has begun to lose steam. Its growth rate plunged to 4 percent in the fourth quarter of last year, after reaching 4.9 percent in the third quarter, 7.9 percent in the second quarter and 18.3 percent in the first quarter.

Such a downward trend is predicted to continue this year. China faces negative factors, such as possible defaults by real estate developers, rising prices of crude oil and other raw materials, trade friction with the U.S., and prolonged global supply chain bottlenecks amid the resurgent COVID-19 pandemic.

Under these circumstances, China finds it difficult to enjoy growth of more than 5 percent this year. The Chinese government is going all out to revive its growth engine. On Monday, the People's Bank of China cut its interest rate for medium-term loans to commercial banks to the lowest level since early 2020 following the outbreak of the pandemic. However, it is unclear whether the country can boost the slumping economy.

The bleak outlook for China could have a devastating impact on the global economy. South Korea could be more vulnerable to China's economic weakness than other countries in the world. Korea's exports to China, its largest trading partner, accounted for 24.6 percent of its total overseas shipments in 2020. Thus, the potential economic woes stemming from China loom large.

The Hyundai Research Institute said that South Korea's growth rate will shrink by 0.5 percentage points if that of China falls by 1 percent. This demonstrates how heavily our economy has depended on China. We have 1,850 materials and products with more than 80 percent of their imports coming from China. Major South Korean industrial sectors such as semiconductors, petrochemicals, steel and machinery are likely to be hit hard by China's economic slowdown. The Korean currency could also lose its value further against the U.S. dollar if the Chinese economy remains stagnant.

The government and businesses should work out detailed measures to reduce the excessive reliance on China. Such measures are all the more necessary as South Korea is facing dangers of falling victim to the escalating Sino-U.S. competition. Korea must also diversity its import sources of raw materials and parts, while exploring new export markets around the world.

It is equally important to minimize the impact of the U.S. Federal Reserve's move to end its asset purchase program and raise its key interest rate as early as March. At stake is how to ensure financial stability and economic recovery in the face of downside risks deriving from the G2 countries.
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