The Bank of Korea announced on September 17 that South Korea’s direct investment in China totaled US$1.75 billion, down 43.7% from a year ago, for the first seven months of this year. During the same period, the direct investment in China from the European Union, Japan and the United States fell 1.2%, 3.7% and 37.5%, respectively.
The central bank explained that this is because the conflict between China and South Korea over THAAD deployment in the latter. “China’s economic retaliation in the wake of the deployment of the missile defense system resulted in anti-Korean sentiment in China, which, in turn, caused South Korean companies to refrain from investing in China,” it said.
According to the bank, the other factors include a change in the Chinese government’s foreign investment attraction policy. These days, the Chinese government is limiting foreign direct investment in items requiring excessive energy consumption and causing environmental pollution while working to attract more investment in the advanced manufacturing and service sectors.
Under the circumstances, the foreign investment in China, which increased 5.6% in 2015, fell 0.2% last year and 6.5% during the first seven months of this year.
Meanwhile, over the past 25 years since the establishment of diplomatic relations between South Korea and China, bilateral trade volume expanded 33-fold. The volume increased explosively as the volume of South Korea-Japan trade and South Korea-the US trade increased 2.3-fold and 3.0-fold, respectively. However, the technological gap has narrowed due to the advancement of the Chinese industry, sparking off fiercer competition in major industries.
According to an analysis of recent changes in recent economic relations with the achievements of the two countries’ economic cooperation in honor of the 25th anniversary of the diplomatic ties between the two nations which will fall on August 24 announced by the Federation of Korean Industries (FKI) on August 17, the bilateral trade volume, which stood at only US$ 6.37 billion at the time of the diplomatic ties in 1992, has grown 15.7% on average annually to US$ 211.4 billion in 2016. The volume increased 33.1-fold.
Beginning in 2003, China became the number one export market of South Korea, outclassing the United States. South Korea also became China's fourth largest export market.
In the areas of investment and services, the two countries account for large shares of each other. South Korea invested US$ 4.75 billion in China in 2016, the third largest after Hong Kong and Singapore.
Human exchanges have been active, too. Of the total number of tourists who visited South Korea last year, 46.8% were Chinese. South Koreans accounted for 17.1% of the total number of visitors who visited China last year. Education exchanges also have been active. Chinese students accounted for the highest percentage of foreign students studying in South Korea and vice versa.
However, the industrialization of China has been intensifying competition with South Korea in the global market.
The export similarity between South Korea and China was relatively low at 37.9 in 1998, but steadily climbed to 44.8 in 2015. In particular, export similarity was high for displays (93.6), semiconductors (64.3), and wireless communications (62.4), showing fierce competition in major industries.
As China secures technological competitiveness, export competition is expected to become tougher in the future. China already caught up with South Korea in patent applications in 2009. By 2015, China filed about 30,000 applications which were more than twice as many as about 15,000 applications by South Korea. The technological gap between the two countries is also only 3.3 years.
Recently, diplomatic issues such as South Korea’s deployment of the THAAD System worsened bilateral economic cooperation, hitting the tourism industry hard. Chinese tourists who visited South Korea declined sharply from March this year and reached the level of the MERS Incident in 2015. South Korean tourists to China also slid. Since March of this year, the number of South Korean tourists to China decreased more than 50% year on year.
South Korean cosmetics exports to China chalked up negative growth for the first time since April of 2015. Public investment slumped as well. According to the Commerce Ministry of China, during the first five months of this year, South Korea's investment in China amounted to US$ 1 billion, down 54.5% year-on-year and 49.0% from 2015.