[China Risk, Korea Wave]② Despite Trade Contraction, Some Argue "Korea-China De-risking Underway" Rebuttal

"If the downturn phase of the Chinese economy fully materializes, not only exports to China but also exports to the U.S. and the European Union (EU) will inevitably be negatively affected, making it difficult to achieve the annual growth rate target of 1.3%." (Lee Seung-seok, Associate Research Fellow at the Korea Economic Research Institute)

"Although the China risk will negatively impact the Korean economy in the short term, considering that deleveraging is underway, the influence of China could be limited." (Kwon Hyo-sung, Economist at Bloomberg Korea)

As China-originated risks spread and the Korean economy, which is highly dependent on exports to China, enters the typhoon's influence zone, economic uncertainty has engulfed the second half of the year. The default crisis of Country Garden (Biguiyuan), a major Chinese real estate developer, has heightened caution, increasing downside risks to the government's 'low in the first half, high in the second half' outlook, which aimed for a positive export turnaround in the latter half. On the other hand, there is a strong counterargument that the possibility of this Chinese real estate crisis spreading to global financial market instability is limited, given that 'de-Chinaization' is already underway due to the sharp decline in exports to China.

Market attention is immediately focused on the revised economic forecast to be announced by the Bank of Korea on the 24th. On that day, the Bank of Korea will release its GDP growth forecast for this year, and the key point is whether it will maintain the May forecast of 1.4% or revise it downward. Having already lowered its outlook five times, all eyes are on whether the Bank will make a sixth consecutive downward revision.

Experts' opinions on the growth rate are also divided. Although the share of exports to China is on a declining trend, China remains Korea's largest trading partner at around 20%, so some believe it will act as a negative factor for the Korean economy. In fact, exports until mid-month have decreased by 16.5% compared to the same period last year, making it likely that the decline will continue for the 11th consecutive month. Exports to China fell by 27.5%, marking the 14th consecutive month of decline through last month, while exports to the U.S. (-7.2%), EU (-7.1%), and Vietnam (-7.7%) also decreased. Private institutions foresee that the China risk could act as a variable, potentially lowering growth forecasts by 0.1 to 0.3 percentage points compared to the Bank of Korea's forecast.

Lee Seung-seok, Associate Research Fellow at the Korea Economic Research Institute, stated, "Since China holds a significant share in the global economy, if downside risks in China materialize, a downward revision of Korea's growth rate is inevitable." He added, "Although the U.S. economy is performing better than expected, macroeconomic burdens are increasing as consumption has slowed since the first half and unemployment claims have risen, increasing downside risks for the U.S. economy in the second half." While exports to the U.S. in items such as automobiles and secondary batteries have increased, showing favorable performance, it is difficult to expect this trend to continue in the second half.

Park Seok-gil, Economist at JP Morgan, predicted, "Looking at quarterly growth rates, growth compared to the previous quarter is expected to fall below average as we move into the second half. The effects of monetary policy will become more visible in the second half, and net exports will turn positive, but domestic demand growth is unlikely to improve compared to the first half, resulting in a growth rate in the low 1% range."

On the other hand, while the slowdown in China's growth is clearly a downside risk that contracts global economic activity and trade, some believe it will not have a strong enough impact to immediately change growth forecasts. Kwon Hyo-sung, Economist at Bloomberg Korea, said, "The share of Greater China in Korea's exports peaked at 38.5% in September 2018 and fell to 23.7% in June this year. Excluding Hong Kong, China's share in Korean exports is only 19.4%, significantly down from the peak of 30.8% in May 2020."

He explained that although China risks will negatively affect Korean growth in the short term, Korea's export share to China has sharply declined over the past five years amid rising U.S.-China trade tensions, and deleveraging is already underway, so the impact may be more limited than feared. Economist Kwon said, "Whether intentionally or not, Korea is decoupling from China. China remains Korea's largest trading partner, but as exports to China decrease, exports to the U.S. and Europe are increasing to offset this, so the Bank of Korea is unlikely to revise its annual growth forecast."

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