Risky Dependency
The expansion of a forecast that the slowdown of Chinese economic growth may be more serious than expected parallels growing anxieties over its impact on the Korean economy. The Korean economy is hinging more heavily on the Chinese economy. Analysis has it that an impact from a decrease in China’s imports will hit Korea hardest, except for New Zealand and Australia, both of which almost synchronize with the Chinese economy.
China has been Korea’s largest trade partner, beating the U.S. since 2003. Korea’s exports to China account for 25.1 percent of its total exports. China’s imports dropped 14.6 percent from Jan. to July this year. During the same period, Korea’s exports dropped 4.9 percent. In Aug., Korea’s exports fell sharply 14.7 percent in Aug. Some experts said that, among the major trade partners of China, it will be Korea that will be the hardest hit by China’s additional devaluations. If China’s imports drop 14.6 percent this year as it did from Jan. to July, Korea’s exports will decrease by US$13.88 billion (16.6 trillion won), which equals 10 percent of Korea’s GDP.
In terms of the amount of exports, a drop in Korea’s exports will follow Australia, Japan (US$18.08 billion), and Germany (US$14.17 billion). China imports the most from Korea, but its percentage dropped to 9.9 percent in July from 10.7 percent in Jan. Korea’s sluggish exports in Aug. prompted Morgan Stanley to lower its forecast on Korea’s growth in 2015 to 2.3 percent from 2.5 percent. China’s yuan devaluation has become another hidden threat to the Korean economy. This is because a weakened Chinese yuan will enhance the price competitiveness of Chinese products and weaken that of Korean products in the export market.
It is highly likely that the U.S. will raise its interest rates so that if the dollar stays strong, the Chinese yuan may go down considerably. A research center at Oxford University forecast that a 10 percent drop in the value of the Chinese yuan will reduce Korea’s GDP and exports significantly, making Korea the biggest victim of yuan devaluation. The center predicted that a 10 percent reduction in the value of yuan will cut down on Korea’s GDP 1.16 percent and exports 1.13 percent.
On a yearly basis, the center predicted that Korea's economic growth rate next year will drop by 0.9 percentage points to 2.5 percent from 3.4 percent, followed by Indonesia with a drop of 0.32 percentage points and Italy with 0.27 percentage points, which means that Korea will suffer around a three times larger drop in GDP growth rate than those two other countries. In exports, an additional yuan devaluation will reduce Korea’s exports to the U.S., Japan, and India 0.59 percent, 0.58 percent, and 0.53 percent, respectively. As China’s export companies compete with Korean, German, Japanese, and U.S. companies in some markets, a sharp drop in the value of yuan will slow down exports of these countries, the center said.