iM: "Limited Impact of Chinese Economic Slowdown on KOSPI... Stimulus Measures Expected"

On September 17, iM Securities assessed that the recent domestic stock market is moving out from under the shadow of China risk, as the correlation between the Chinese economy and Korea’s KOSPI has significantly weakened. In addition to this decoupling, there is speculation that if China implements additional stimulus measures to achieve its growth target for the year, it could further boost the domestic stock market.

AP Yonhap News

Park Sanghyun, a researcher at iM Securities, stated in a report titled "The Background of Decoupling between the Chinese Economy and KOSPI" released that day, "Although deflationary pressures in the Chinese economy persist, unlike before, the decoupling phenomenon between the Chinese economy and KOSPI is becoming more pronounced."

First, Park pointed out that "despite a strong rally in Chinese stocks, the sluggishness of the Chinese economy is serious," noting that all major economic indicators in China either slowed or worsened further in August, following July. He diagnosed that a so-called "triple slowdown" is intensifying, affecting consumption, production, and even investment.

In particular, the fixed asset investment growth rate in China from January to August was only about 0.5% compared to the same period last year. During the same period, the manufacturing investment growth rate was 5.1% year-on-year, which, excluding the pandemic period, is the lowest since December 2019. Park commented, "This is a manufacturing investment growth rate seen during times when concerns over excessive investment risk in China were prominent," adding, "It indicates that the Chinese economy is once again struggling with excessive investment risk." Producer prices have also continued to decline since October 2022.

Accordingly, Park diagnosed, "Following the prolonged weakness in domestic demand centered on the real estate market, a significant number of Chinese exporters have been hit by high tariffs imposed by the United States, and it will be difficult for them to avoid further shocks in the future. For these reasons, it will not be easy for the Chinese economy to escape from excessive investment risk." He further evaluated, "To achieve this year's growth target, it is highly likely that the Chinese authorities will implement additional monetary easing and liquidity expansion policies."

As for specific stimulus measures, he predicted, "It is somewhat late to pursue additional fiscal policies at this point. Ultimately, the remaining options for stimulus are likely to be a rate cut or a further reduction in the reserve requirement ratio." If the US Federal Reserve, which is set to decide on interest rates this week, resumes its rate cut cycle, the People's Bank of China would also have more room to lower rates. China's growth target for this year is around 5%.

He assessed that the impact of this Chinese economic slowdown on the domestic economy and financial markets would be limited. Park explained, "Unlike in the past, the correlation between the Chinese economy and the domestic stock market has significantly weakened. The so-called domestic stock market is moving out from under the shadow of China risk," identifying three main reasons for this.

First, the trade deficit with China has not worsened further. He remarked, "The pressure on Korean exports to China from the negative effects of China's economic slowdown or increased competitiveness is limited." Second, he analyzed, "The industries currently driving domestic exports are not industrial or capital goods as in the past, but rather semiconductors, shipbuilding, and defense. In a situation where export risks to China are not worsening, these sectors are leading the domestic stock market and exports, helping to escape from China risk." Third, he pointed to export diversification. He evaluated, "Although not entirely satisfactory, the proportion of exports to China in total Korean exports is decreasing significantly, while exports to the United States and ASEAN countries are showing strong performance, thereby weakening China risk."

Park added, "In addition, the global artificial intelligence (AI) investment cycle, abundant global liquidity flows, and expectations for the development of the domestic capital market are also contributing to this decoupling phenomenon." He predicted, "Despite the sluggishness of the Chinese economy, the trend of differentiation between the domestic stock market and the economy will continue." He further stated, "Moreover, if China implements additional stimulus measures to achieve its growth target this year, it will further support the additional rise of the domestic stock market."

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