Strained Relationship
The Chinese government is looking to shift the focus of its industrial policy from the export of finished goods based on the import of intermediary goods to the procurement of intermediary goods within China. Under the circumstances, exports from Korea to China decreased by 0.4 percent last year and 2.1 percent in the first half of this year, and the recent devaluation of the yuan is expected to have a negative impact on the exports as well.
The devaluation is likely to cause Korean mobile phones, mobile phone components, ships, electronics products, and the like to become less competitive in price due to the high export similarity between Korea and China regarding those items. Last year, the two countries recorded an export similarity index of 0.346 in the U.S. import market. Although the figure was less than that between Korea and Japan at 0.517, it has continued to go up since 2010. The index reached 0.845 with regard to mobile phones and handset components, 0.558 in the shipbuilding sector, and 0.505 when it comes to electronics and electrical products.
Fortunately for Korea, though, the current situation can lead to at least some improvement in profitability on the part of exporters because steel sheets, precision chemical materials, and raw materials such as coal and non-metallic minerals can be imported at lower prices. In addition, the exports from Korea to China can be recovered if the Chinese economy and domestic consumption perk up in the long term based on a currency devaluation.
“The devaluation of the yuan has both positive and negative effects,” the Korea Institute for Industrial Economics & Trade explained, adding, “It seems to be more negative in the short term, but rather positive in the end, because Korea’s exports to China revolve around intermediary goods.”