Impenetrable Market
The Korean government and Korean companies are slow to make use of the Chinese consumer market, which is the second-largest in the world worth approximately US$6 trillion.
The number of M&A deals Korean companies signed in China has halved in the past one year in spite of the appreciation of the Korean currency while intermediary goods still account for no less than 73 percent of Korea’s exports to China although the Chinese government has been suppressing processing trade for way over 10 years. It is pointed out that measures for penetrating the Chinese consumer market are urgently required, with Korea’s total exports and those to China on the decline for nine and three consecutive months, respectively.
According to the Ministry of Strategy & Finance, between 2013 and last year the size of M&As and share purchases by Korean companies targeting Chinese firms decreased from US$860 million to US$300 million, a five-year low. Although the amount recovered to US$310 million in the first half of this year, it is eclipsed in comparison to the total of US$1.44 billion that was recorded four years ago.
The number of concluded M&A contracts decreased from 156 to 76 between 2013 and 2014 as well to reach the lowest level since 2002. In the first six months of this year, the number stood at 45, too. In other words, Korean companies are failing to take advantage of their opportunity brought about by the appreciation of the won following a significant current account surplus.
Korean firms are still clinging to processing trade in their business with China, although the Chinese government has inhibited it for about 15 years. This is affecting the positive effects of the Korea-China FTA in terms of consumer market penetration. The Korean government remarked in Sept. last year that Korean industry needs to shift its focus from intermediary goods to consumer goods, but things have not changed much. According to the Bank of Korea, the ratio of processing trade to China’s overall trade dropped from 53.7 percent to 32.8 percent between 1998 and 2014. However, intermediary goods and consumer goods took up 73 percent and 7 percent of Korea’s exports to China as of the end of last year, respectively.