"China Changes to No Longer Need Korean Intermediate Goods... Reopening Effect Expected to Be Lower Than Anticipated"

[Impact and Outlook of China's Reopening] Expert Interview
Jae-Hyun Han, Senior Resident Representative, Bank of Korea Shanghai
Exports to China Negative for 9 Consecutive Months
Need to Find Opportunities in Consumer Goods and Services
Rapid Growth in Medical, Elderly Care, and Pet Markets
Attention Needed on Changing Travel Styles of Chinese Tourists

Editor's NoteAmid concerns about a global economic slowdown, China's reopening has emerged as a major variable for a global economic rebound. While some view China's pursuit of qualitative growth as a sign that the economic effects may be overestimated, many expect that the economic circulation driven by increased Chinese consumption will have a positive impact on the global economy. The benefits that the Korean economy can gain from China's reopening are expected to vary across industries such as semiconductors, aviation, and distribution. However, there are also observations that efforts to exclude China from the global supply chain due to US-China conflicts could limit the economic effects of the reopening.

"More than 70% of South Korea's exports to China are intermediate goods, but as China's technological development increases its self-sufficiency rate, the need for intermediate goods supplied by us is diminishing. The recovery of the Chinese economy following the reopening (resumption of economic activities) is expected to be centered on service consumption such as travel, accommodation, and dining."

Han Jae-hyun, Senior Resident Representative of the Bank of Korea in Shanghai, said in an interview with Asia Economy at the Bank of Korea headquarters in Taepyeong-ro, Seoul, earlier this month that the domestic growth-enhancing effects from China's reopening may not be as large as expected. After the Chinese government set this year's economic growth target at around 5%, lower than market expectations, concerns have been raised that the effects of China's reopening may not reach past averages. As expectations for China's growth decline, the Korean economy, which is highly dependent on exports to China, is inevitably facing a blow. Exports to China in February amounted to $9.88 billion, continuing a nine-month consecutive decline compared to the same month last year, triggering alarm bells. The resident representative said, "The reason exports to China are not the same as before is not only due to the sluggish Chinese economy but also structural changes in Chinese industries such as increased self-sufficiency. Currently, as technological superiority determines geopolitical dominance (techno-politics), we must actively develop high-tech technologies and simultaneously strive to secure competitiveness in China's final consumer goods market."

Hanjaehyun Han, Senior Resident Representative of the Bank of Korea in Shanghai. Photo by Younghan Heo younghan@

- China set its GDP growth target for this year, the first year of 'With COVID,' at around 5%, lower than last year's (about 5.5%).

▲ Considering last year's growth rate of 3% and the base effect, there is a high possibility of exceeding the growth target this year, so setting a lower growth rate than market expectations has political advantages. Also, China's economic (GDP) size has grown to about 77% of the US level. The economy has grown so large that sustaining high growth like in the past is difficult. On the 13th, newly appointed Premier Li Qiang presented three major goals for the new executive team: improving people's quality of life, high-quality development, and deepening reform and opening up. This indicates that the Chinese government's policy direction is shifting from quantitative growth to qualitative development, emphasizing distribution as much as growth.

- As China's technological capabilities improve, South Korea's exports of intermediate goods have significantly contracted. The competitiveness of Korean intermediate and final goods in the Chinese import market has declined, leading to sluggish exports to China.

▲ Exports to China have recorded negative growth for nine consecutive months from June last year to February this year, showing that exports to China are not the same as before. South Korea's export share to China fell from 25.3% in 2021 to 22.8% last year. China's role as a production base is shrinking, and production bases are shifting to Southeast Asia and other regions, rapidly changing China's role as the world's factory. South Korea, which is highly dependent on exports to China, needs to consider and strive to enhance competitiveness through high-tech technology development. Currently, technological superiority determines geopolitical dominance (techno-politics). To continue growth against China, reliance on intermediate goods alone is insufficient; diverse revenue sources such as final consumer goods and services must be sought. In particular, attention should be paid to rapidly growing sectors in China such as healthcare, elderly care, pet economy, and single-person economy.

- Although there are consistent calls to reduce dependence on China to strengthen export competitiveness, alternatives are not easy.

▲ For the time being, high dependence on China will continue. As long as the world's factory remains in China, Korean companies will inevitably continue supplying intermediate goods to China. However, it is necessary to gradually reduce this share step by step. Taiwan, for example, is reducing the share of factories in China by about 2 percentage points annually. In 2018, 89.5% of overseas production bases were located in China, but by 2021, this share had decreased to 82.2%.

- With ongoing US-China conflicts, South Korea's strategic choices have become crucial. How should the balance between the two countries be maintained?

▲ It is a very difficult situation for South Korea, which needs both US technology and the Chinese market. The fact that China, including Hong Kong, accounts for 55.3% of semiconductor exports, which make up one-third of our exports, proves this. China's importance as a semiconductor market cannot be ignored. If the US continues to restrain China, there is concern about losing the huge Chinese market. This is a critical time to skillfully navigate both sides, prolong negotiations as much as possible, and improve our technological level. Cooperation with China is possible on a case-by-case basis in various fields such as semiconductors, electric vehicles, artificial intelligence (AI), and big data. China's technology level in AI, electric vehicles, and satellites has risen considerably. For example, China has entered the aircraft market, which was previously dominated by US Boeing and European Airbus. China is likely to enter third markets in aviation with low prices as a weapon. Although China's semiconductor technology is inferior to South Korea, Taiwan, the US, and the Netherlands, it exports a large volume of mid- to low-end technology semiconductors. US technology restrictions will be a significant hindrance to China's economic growth for the time being, and although it will take time, if China succeeds in independent development, it will become a greater threat to us. Ultimately, our semiconductor industry must widen the technological gap with China, and if not, exports to China may become even more difficult.

Hanjae Hyun, Senior Resident Representative of the Bank of Korea in Shanghai. Photo by Younghan Heo younghan@

- The current US-China conflict reminds us of Japan's past. There is a view that China will not follow Japan's path.

▲ The fundamental difference is that Japan relied on the US for security, whereas China does not. Therefore, for the US, China is a much tougher opponent than Japan. China is also at a very important turning point. At least for a while, US restrictions or controls on Chinese technology such as semiconductors are expected to shock the Chinese economy. The US-China conflict will last a long time, and the hegemonic competition will also be prolonged. Although China still lags significantly behind the US in economic and military power, China is a nation of perseverance (wasin sangdan). It can endure for a long time and sustain itself through basic self-sufficiency.

- There are concerns that China's reopening will expand demand and raise domestic prices due to rising crude oil and raw material prices and inflationary pressures within China.

▲ The biggest concern regarding China's economic recovery is the sharp rise in crude oil and raw material prices due to increased Chinese demand, leading to global inflation issues. Although global prices are showing signs of gradual stabilization, China's reopening poses a significant threat to price stability.

- The influx of Chinese tourists is expected to help improve the domestic service industry's business conditions. What efforts are needed to enhance service industry competitiveness?

▲ In 2016, Chinese tourists numbered 8.07 million, accounting for nearly half (47%) of all tourists. However, due to the impact of COVID-19, last year, Chinese tourists numbered only 230,000, just 7% of all tourists. In the past, Chinese tourists mainly traveled in so-called flag group tours, but now individual travel is more common. Just as people watch musicals when visiting London, UK, South Korea needs to enhance its attractiveness more in terms of software rather than hardware. We need to develop various cultural products and themed tours so that tourists who have visited once want to keep coming back.

- During this year's Two Sessions (National People's Congress and Chinese People's Political Consultative Conference), China emphasized exchanges over military force regarding Taiwan's recovery. Is this a reflection of concerns that Taiwan might be the next Ukraine?

▲ As tensions in the Taiwan Strait escalate, some fear that Chinese President Xi Jinping might invade Taiwan during his tenure, but the possibility is low. An invasion of Taiwan by China has no practical benefit. China cannot develop core industries without Taiwan's semiconductors. Severing ties with Taiwan would mean the collapse of China's semiconductor-centered industries. The difference between Taiwan and Ukraine is that Taiwan has a semiconductor shield. Both China and the US want to maintain the status quo. Major companies supplying smartphone chipsets, including TSMC, the world's largest semiconductor foundry, are based in Taiwan. As Taiwan's semiconductor dominance has strengthened, the argument that semiconductors will serve as a shield remains valid.

- China also faces demographic changes such as aging, which are seen as factors limiting medium- to long-term growth.

▲ Last year marked the first population decline in China in over 60 years since 1961. The demographic bonus has disappeared, transitioning to a demographic onus era. When the working-age population increases, labor and consumption rise, creating a virtuous cycle that promotes economic growth; conversely, when the working-age population decreases, labor costs rise, demand falls, and the economy contracts. China abolished its one-child policy in 2016 and allowed two children, then introduced a three-child policy in 2021. Recently, discussions on extending the retirement age have been active. Demographic issues are a key factor that will constrain China's economic growth in the long term.

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