[Insight & Opinion] The Unsettling 'Chinese Dream': Distancing Is the Answer

Choi Tae-won, Chairman of SK Group, recently mentioned in an interview with foreign journalists that Korean companies need to move away from a structure focused on the Chinese market and seek other markets while expanding new industries such as artificial intelligence. Despite China being the largest trading partner, German Chancellor Olaf Scholz has warned companies to be cautious of the geopolitical risks in their China operations. Joachim Nagel, President of the German Central Bank, also stated that the volatility of the Chinese economy is increasing and emphasized the need to reduce trade dependence on China. In June, Xing Haiming, Chinese Ambassador to Korea, advised Lee Jae-myung, leader of the Democratic Party of Korea, that “the cause of Korea’s deepening trade deficit with China is ‘de-Chinaization,’ and if Korea firmly maintains its trust in cooperation with China and adapts to changes in the Chinese market and industrial structure, it will surely continue to enjoy the bonus of China’s economic growth.”

Which argument is valid? If the Chinese economy can continue to serve as a growth engine for the global economy, Ambassador Xing’s claim may be correct. However, if the Chinese economy not only fails to drive the global economy but becomes a source of global economic uncertainty, reducing dependence on China is the solution.

In the post-COVID-19 world economic restructuring process, another form of 'decoupling' is unfolding. While the Chinese economy is experiencing severe difficulties without the expected 'reopening' effect, the U.S. economy is showing strength, even mentioning price stability without recession. The European economy is also nearly out of the bottom. The problem is that in this global economic 'decoupling,' the Korean economy is more hampered by the shadow of China’s stagnation than by the U.S. economic recovery.

Since 2018, when high tariffs imposed by the U.S. made export-led growth difficult, the Chinese government has pursued a ‘dual circulation growth strategy’ focusing on domestic demand rather than exports from 2020. However, the Chinese economy currently faces a ‘dual circulation recession phase’ externally due to U.S. ‘decoupling’ and internally due to excessive debt, real estate market slump, and weak consumption. Despite the end of COVID-19, the housing market slump and worsening employment conditions have suppressed consumption, resulting in a 0% increase in the consumer price index in June, facing deflation risk. The manufacturing Purchasing Managers’ Index (PMI) in July was 49.3, marking four consecutive months of contraction. Chinese exports increased by 7% in 2022 but decreased by 3.2% in the first half of this year, while imports rose by 1.1% in 2022 but fell by 6.7% in the first half of this year. Nevertheless, the Chinese government has yet to find a breakthrough due to conflicts between structural reforms and economic stimulus policies.

Comparing 2018 and January to July of this year, China’s share in Korea’s exports dropped from 26.8% to 19.7%, while its share in imports rose from 19.9% to 22.1%. In other words, in the supply chain, China is already moving away from Korea due to technological catch-up in intermediate goods, but Korea’s dependence on Chinese intermediate goods imports is increasing.

Xi Jinping’s ‘Chinese Dream’ is becoming an increasingly unsettling dream. Moreover, China’s role as a driver of the global economy is weakening. Yet Korea is increasing its dependence on China in the supply chain, which also raises geopolitical risks. Referring to the German government’s choice, the Korean economy is heading in a dangerous direction. It is now time for the Korean economy to wake up from the Chinese Dream. A national response strategy for the post-pandemic global economic restructuring is urgently needed.

Kim Dong-won, Former Visiting Professor at Korea University

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