The United States Department of the Treasury designated China as a currency manipulator on Aug. 5. This is likely to have a negative impact on South Korean exporters, which are heavily dependent on China. The Korean won and the Chinese yuan tend to move in the same direction and a yuan appreciation is likely to lead to a higher value of the won and higher prices of South Korean products.
The United States urges a currency manipulator to redress situations such as currency undervaluation and an excessive trade surplus within one year. In the event of no improvement, measures can be taken such as corporate investment limitation, limited access to federal procurement contracts and a request for additional monitoring by the IMF.
According to Treasury Secretary Steven Mnuchin, China recently took measures in order to devalue the yuan and the United States is going to cause the yuan to appreciate based on the designation. Then, the won is likely to appreciate together, making South Korean products more expensive with South Korea’s exports already sluggish. In June this year, South Korea’s exports on a customs clearance basis totaled US$44.09 billion with a year-on-year decrease of 13.7 percent and its exports to China totaled US$10.47 billion with a year-on-year decrease of 24.2 percent. South Korea’s total exports fell on year for the seventh consecutive month and its exports to China fell for eight months in a row with the steepest drop.
The yuan appreciation is likely to result in a decline in exports from China and this also has a negative impact on South Korean companies. In many cases, the companies sell intermediate goods to Chinese companies and the latter export finished products by processing the goods. At present, export for re-exportation purposes accounts for 65.3 percent of South Korea’s exports to China, including 49.6 percent for processing trade purposes, whereas export for China’s domestic markets stands at 34 percent. According to the IMF, South Korea’s economic growth rate falls 0.5 percentage point every time that of China falls one percentage point.
The real economy side is predicted to face an increasing downward pressure as well. A rise in exchange rate volatility is forecast to result in more foreign exchange losses mainly on the part of small firms. “In the past, currency manipulator designation led to a strong currency in the short term as seen in the cases of South Korea, Taiwan, and so on,” said KB Securities analyst Lee Eun-taek, adding, “Still, an actual yuan appreciation remains to be seen in that the Chinese economy is huge and the designation resulted from the U.S.-China trade war.”