The Effects of China's Monetary Policy on Korea
The Economic Research Institute of the Bank of Korea said in its report on Aug. 10 that the Chinese government is extending its monetary easing policy in response to COVID-19 and its trade disputes with the United States and the policy is leading to an increase in South Korea’s exports, intermediate goods exports in particular.
“In most cases, a relative appreciation of the won resulting from a depreciation of another currency leads to a decline in South Korea’s export competitiveness,” the institute said, adding, “However, the ongoing depreciation of the yuan is leading to an increase in exports from South Korea as the volume of South Korea’s trade with China is huge and intermediate goods exports account for as high as 73.2 percent of the former’s exports to the latter.”
According to the institute, China's policy has considerable effects on South Korea’s stock market, consumer prices and interest rates as well. “The policy is leading to a depreciation of the yuan, a decline in return on Chinese assets, and an investment flow into South Korea,” it explained, continuing, “The investment flow into the bond market has affected a fall in bond yield, the flow into the stock market has led to a rise in stock prices, and the policy has caused the international prices of raw materials to rise along with consumer prices in South Korea.”
The People’s Bank of China has supplied money in order to stimulate the local economy. The bank lowered the cash reserve ratio by 5.5 percentage points and the one-year loan rate by 0.35 percentage points or so from March 2018 to December 2020. In addition, it is controlling the market liquidity by market-friendly methods such as repurchase agreement transactions. As a result, the won-yuan exchange rate changed from 166.33 won to 176.69 won per yuan from Jan. 2 last year to Aug. 9 this year.
“China is focusing on economic growth led by the domestic demand while increasingly opening its forex and financial markets,” the institute commented, adding, “This means the monetary policy of China is likely to have increasing effects on South Korea’s exports to China and its foreign exchane and financial markets.”