"Rising US-China Tensions with Upcoming CCP Leadership Election... Downside Risks for Exports to China"

The Bank of Korea's Report on the Outlook of the Chinese Communist Party National Congress and Its Economic Impact

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[Asia Economy Reporter Seo So-jeong] As the 20th National Congress of the Communist Party of China is scheduled to elect the party leadership for the next five years this month, an analysis has emerged that China's sluggish economic growth is likely to pose downside risks to South Korea's exports to China, particularly in cyclical sectors such as semiconductors, steel and machinery, and chemical products.

On the 9th, the Bank of Korea stated in its report "Outlook for the National Congress of the Communist Party of China and Its Economic Impact," published in the 'Overseas Economic Focus,' that "the party leadership for the next five years is expected to be elected between the 16th and 22nd of this month," and added, "the continuation of the existing policy stance of 'growth amid stability' may delay domestic demand recovery, and the intensification of the US-China economic dispute could act as downside risk factors for China's economic growth."

According to the report, with General Secretary Xi Jinping's third term almost certain, the entry of his close-knit group, the Xi family faction (習家軍, Xi Jia Jun), into the top leadership is expected to increase further. In particular, there is speculation that reformists or pro-market figures currently holding positions such as Premier, Vice Premier for Economic Affairs, and Governor of the People's Bank of China may all be replaced by conservative figures.

Accordingly, with major political schedules in place, the zero-COVID policy is expected to be maintained until the first quarter of next year, and China's economic sluggishness is likely to persist for the time being. Goldman Sachs recently suggested that considering Xi's policy encouragement remarks and the low vaccination rate (38%) among the elderly (over 80 years old), the zero-COVID policy may not be lifted until the second quarter of next year.

According to major global investment banks (IBs), due to the continuation of the zero-COVID policy and lockdown measures, China's economic growth rate this year is expected to record the second-lowest level since the reform and opening-up. In 2020, when COVID-19 first broke out, China's economic growth rate hit a record low of 2.2%, and the average forecast by major IBs for this year is 3.2%.

Furthermore, following the National Congress in October, the Chinese government's major policy directions such as common prosperity (共同富裕, Gongtong Fuyu) and deleveraging (repayment and reduction of debt) are expected to be maintained, leading to a continued sluggish real estate market. Given the high proportion of construction, furniture, and other real estate-related activities in China's gross domestic product (GDP), a weak real estate market is expected to exert downward pressure on economic growth.

UBS pointed out that with the real estate-related industry accounting for about 24% of China's GDP, a 10% contraction in the real estate market could reduce the economic growth rate by up to 2.5 percentage points. Additionally, the expansion of developer defaults and decreased demand for local government bonds may lead to capital outflows from foreign investors, increasing volatility in the financial markets.

Moreover, amid the decline of reformists and pro-market advocates, the Communist Party leadership's shift toward conservatism and hardline stances may harden China's response to US pressure measures, potentially intensifying conflicts in sectors such as trade and semiconductors.

Lee Jun-young, head of the China Economy Team at the Bank of Korea, diagnosed, "The slowdown in China's growth rate and the global supply chain restructuring in the semiconductor and battery sectors are expected to negatively impact our economy. Due to US regulations, short-term negative effects are anticipated on exports to the US by battery and electric vehicle companies that largely depend on China for battery materials and components, and there are concerns about disruptions in the transition to advanced semiconductor processes and capacity expansion at our companies' semiconductor production plants in China."

He added, "It is necessary to actively pursue diversification of supply sources for key raw materials such as lithium, decentralization of semiconductor and electric vehicle production facilities, support for investment in advanced industry infrastructure and tax benefits, as well as expansion of research and development (R&D) and workforce training."

This content was produced with the assistance of AI translation services.