China Shock
Another China shock is affecting the Korean economy from the onset of this year. According to industry sources, the value of the Chinese currency is estimated to fall to 6.5336 yuan per U.S. dollar six months from now (down 0.6 percent compared to the beginning of this year) and to 6.7207 yuan at the end of this year (down 3.4 percent). Some investment banks are even mentioning 6.9 yuan for this year’s end based on an outflow of funds accelerated by the slowdown of the Chinese economy.
Under the circumstances, the Chinese and Korean currencies are showing a greater tendency for coupling than before these days, implying that global investors’ concerns over the Chinese economy are spreading to the Korean economy as they are. “Many international investors regard Korea as a part of the Greater China region with the stock and forex markets of both countries sharing the same direction,” said an industry insider. Between July last year and Jan. 7, 2016, the value of the yuan vis-à-vis the U.S. dollar declined by approximately 5.74 percent from 6.2082 to 6.5646, and the value of the Korean won vis-à-vis the U.S. dollar fell about 4.69 percent during the same period.
The devaluation of the yuan is likely to trigger that of the won, and then Korean exporting firms can take a hit in the fields where they are competing neck-and-neck with Chinese firms. Last month, Korea’s total exports declined 13.8 percent from a year ago, led by a 35.1 percentage decrease in ship exports, a 23.2 percent decrease in steel product exports and a 17.1 percent decrease in semiconductor exports. The export from Korea to China fell 16.7 percent during the same period, too.
Korea’s exports to Japan and the United States declined 13.1 percent and 4.7 percent last month as well, respectively. This also implies that Korean firms are losing their competitiveness in those fields due to the devaluation of the Chinese currency.