[Financial Planning for the 100-Year Life] China Risks Holding Back the Korean Economy

China's daily COVID-19 cases have exceeded 30,000. As a result, international oil prices fell below $80 per barrel, and the U.S. stock market also declined. From the perspective of South Korea, which experienced up to 620,000 cases per day, or the United States, which surpassed one million cases, China may seem to be overreacting. However, China's view is different. For Chinese people who believe there is no error in the Communist Party's judgment, an increase in confirmed cases could be seen as a mistake by the Party. This would lead to resentment over the imposition of the initially impossible zero-COVID policy, damaging the Party's reputation.

When Shanghai was locked down in April, the daily number of confirmed cases was about 27,000. As a result, China's growth rate for the second quarter dropped to 0.4%. Currently, confirmed cases exceed 30,000, and regions accounting for 21% of China's Gross Domestic Product (GDP) are under lockdown due to COVID-19. A month ago, this proportion was about 9.5%, so the impact of lockdowns has more than doubled in a short time. This inevitably causes significant negative effects on the economy, which so far have mainly appeared in exports and consumption.

In October, China's exports decreased by 0.3% compared to the same period last year. This is the first decline since June 2020, differing from the double-digit export growth maintained during the logistics disruptions caused by the Shanghai lockdown in April. Consumption shows a similar trend. The consumption growth rate fell to the 2% range in the third quarter, and if lockdowns intensify, consumption could contract further. The slowdown in exports and consumption reduces growth. If China's growth rate falls to the mid-2% range in the fourth quarter due to COVID-19, the annual growth rate will drop below 3%, an unprecedented event in decades.

To prevent further deterioration, the People's Bank of China lowered the reserve requirement ratio (RRR) by 0.25 percentage points. This is the second RRR cut since April, and from December, the weighted average RRR in China's financial sector will decrease to 7.8%. The People's Bank expects that this cut will release 500 billion yuan into the market. This policy direction differs from that of major central banks, indicating significant concerns about the spread of COVID-19.

The spread of COVID-19 in China negatively affects our economy. The biggest concern is exports. From the beginning of this year to October, South Korea's exports to China increased by only 0.7% compared to the same period last year. Monthly data shows a more severe situation: exports to China declined for the first time in June compared to the previous year, and by October, the decrease widened to 15.7%. By November 20, the export decline rate reached 28.3%, making it difficult to expect any improvement soon.

As exports decrease, the trade balance has worsened. From January to October, we earned $2.62 billion through exports to China. If exports remain sluggish in November and December, resulting in a trade deficit larger than what was earned in the ten months, this year will mark the first trade deficit with China since 1992. The increase in China's COVID-19 cases has added another burden to our already struggling economy. We hope that the rise in China's COVID-19 cases will end quietly without pressuring the economy as it did in April.

Lee Jong-woo, Economic Columnist

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