"Trump's Second Term to Cause 2%P Drop in China's Economy? ... Overestimated"

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There is an analysis suggesting that the assessment that China’s economic growth rate could fall by up to 2 percentage points due to the launch of Trump’s second term is somewhat exaggerated. Amid concerns about ‘Peak China,’ which implies that China’s economic growth rate has reached its peak, it is predicted that by around 2038, China will develop alongside the United States as one of the two pillars of the global economy.

Lee Chi-hoon, Head of the Emerging Economies Department at the International Finance Center, made these remarks on the 2nd at The Plaza Hotel in Jung-gu, Seoul, where he attended as a speaker at the ‘10th Anniversary Conference of the Opening of the Won-Yuan Direct Trading Market,’ jointly hosted by the International Finance Center and the Seoul branch of China’s Bank of Communications.

Lee said, “Since the launch of Trump’s second term is a significant pressure factor on the Chinese economy, there are forecasts that assuming a 60% tariff imposition, China’s economy could decline by 0.7 to 2.0 percentage points. However, such concerns are somewhat excessive.”

He pointed out, “China’s exports to the U.S. account for 15% of China’s total exports, and even if these decrease by 40%, it would only reduce China’s total exports by about 3 to 4%. Therefore, the evaluation that a 3 to 4% reduction in total exports would lead to a 2% decrease in China’s economic growth rate is excessive.”

Lee Chi-hoon, Head of Emerging Economies Department at the International Finance Center, is speaking as a presenter at the "10th Anniversary Conference of the Opening of the Won/Yuan Direct Trading Market," jointly hosted by the International Finance Center and the Bank of Communications Seoul Branch, held on the 2nd at The Plaza Hotel in Jung-gu, Seoul. (Photo by Park Jae-hyun)

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Regarding the so-called ‘Peak China’ concern that China’s economic growth rate has passed its peak, he explained, “Although China’s economic growth rate is slowing down, China’s economic influence is expected to continue in the future. Looking at the increase in Gross Domestic Product (GDP), the U.S. growth from 2021 to 2025 is quite high, but assuming China grows at 3.5% and the U.S. at 2.0% from 2026 to 2030, by 2038 China will be at a level comparable to the U.S.” He added, “Rather than one of the two pillars overwhelming the other, it seems that the U.S. and China will develop as the two main pillars of the global economy.”

Accordingly, the use of the yuan in South Korea is expected to expand further. Lee said, “South Korea’s trade with China accounts for about 23% of total trade, and when including Hong Kong, it nearly matches the combined trade with the U.S. and Europe. (Based on January to October this year) exports to the U.S. are about 11%, still about half of China’s, so in terms of trade, China remains the largest partner, and it is difficult for other countries to replace it.”

He continued, “South Korea’s yuan trade settlements are expected to roughly double from the current 10.3% by around 2030. Compared to December 2019, the exchange fee rate for the yuan has dropped from 5% to 3%, while the U.S. rate has risen to 7%, so there is considerable competitiveness in terms of funding.”

The Bank of Korea also stated that the scale of yuan settlements has been steadily increasing recently. Kim Shin-young, a foreign exchange market team leader at the Bank of Korea who also attended as a speaker, said, “Since 2016, South Korea has grown into the world’s fourth-largest offshore yuan and local currency direct trading market after Singapore, the UK, and Hong Kong. The scale of yuan settlements in Korea-China trade has steadily expanded from 1% in 2014 to 11% this year.”

However, he pointed out that won-yuan direct trading with customers is very sluggish compared to interbank transactions. Kim explained, “Won-yuan transactions are 97.1% interbank, and among these, the top five banks account for 80%, concentrating direct trading in a few banks. This contrasts with the won-dollar exchange rate, where interbank and customer transaction shares from January to September were 44.5% and 55.5%, respectively.”

He added, “The sluggishness of won-yuan direct trading with customers is due to a preference for dollar settlements, and this trend is unlikely to be resolved. To continuously expand the actual demand from companies and individuals, it is necessary to develop trade finance support measures and create customer demand such as personal currency exchange.”

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