South Korean Economy Likely to be Affected by Turmoil in Hong Kong

Mass rallies in Hong Kong are adding to the uncertainties of the South Korean economy along with the ongoing trade disputes between the United States and China and Japan's economic retaliation against South Korea. The rallies are being mentioned as a potential factor that can lead to an all-out trade and currency war between the United States and China.

At present, the manufacturing sector of South Korea, which is highly dependent on exports to China, is going through hard times and South Korea’s financial and foreign exchange markets are shaking with downward economic pressures mounting. According to the Korea International Trade Association, South Korea’s exports to China and the United States accounted for no less than 26.8 percent and 12.1 percent of its total exports in 2018, respectively. The combined ratio was second only to that of Taiwan, 40.6 percent.

The current situation in Hong Kong can be another inflection point in the U.S.-China trade war. The Chinese government is convinced that the United States is behind what is going on in Hong Kong and Chinese riot police officers are already in Shenzhen, which is close to Hong Kong. Renmin University professor Shi Yinhong remarked that the United States will stop its preferential treatment for Hong Kong if China intervenes too much in the situation.

Then, South Korean companies located in Hong Kong will have to face more difficulties. Approximately 1,500 South Korean companies, including Korean Air, KEB Hana Bank, Daesang Hong Kong and Samsung C&T Hong Kong, are currently doing business there. In 2018 alone, South Korean companies made 194 investments there with a combined value of more than US$1,826.54 million.
 

South Korea’s exports to China via Hong Kong can be negatively affected as well. “Approximately 10 percent of South Korea’s export to Hong Kong is for export to China and the impact will be particularly conspicuous in the electronics and machinery sectors,” the Korea Development Institute explained.

Last year, semiconductor chips accounted for 60 percent of South Korea’s exports to Hong Kong. The ratio goes up to 82 percent when electronics and machinery are included in the calculation. In 2018, South Korea’s trade with Hong Kong and the Hong Kong-China region represented 7.6 percent and 34.4 percent of its total trade volume, respectively. In 2017, South Korea’s exports to Hong Kong were the fourth-largest behind those to China, the United States and Vietnam and South Korea’s trade surplus with Hong Kong was the second-largest on its list by country.

Recently, the Bank of Korea predicted that a one percentage point decrease in the GDP growth of the United States and the same decline in the GDP growth of China attributable to the trade war would result in a 2.4 percent decrease and a 1.7 percent decrease in South Korea’s exports, respectively. The situation in Hong Kong was not reflected in the forecast. In other words, South Korea’s exports may further decrease depending on the situation.

The tourism and aviation industries can take a direct hit, too. South Korean airlines have reduced their flights to Japan since its export restrictions and the Chinese government recently blocked new flights to China. Hong Kong, in the meantime, has been one of the most popular destinations for South Korean tourists.