Awareness of and Response to China Risk

|Korean Peninsula

The economic relationship between the ROK and China has rapidly become closer and concerns are increasingly being voiced within the ROK that its dependence on China is too great. In fact, last year, China accounted for 21.7% of the ROK’s total exports and 40.3% of its overseas investment; from this, one can realize the degree of concentration on China that exists at present. China has taken over from the US, which held the position of the ROK’s largest trading partner over the 40 years or so from the 1960s, when economic development began, until the early part of the 21st century; this change has occurred in less than ten years, since China officially began engaging in trade. Looking at the situation in terms of recent exports to China and the rate of increase in investment, it seems likely that China’s weighting in the ROK’s economy will become even greater.

For the ROK, which had struggled to achieve an increase in exports due to more intense competition and the low growth of developed nations such as the US and the countries of Europe, the vast market that is China seemed like a knight in shining armor. In fact, amidst the recent severe slump in domestic demand in the ROK, exports have supported the economy and the majority of these exports were possible precisely because of China.

However, just as good medicine becomes harmful if one takes too much, the deepening of economic relations with China risks having a seriously adverse impact on the economy of the ROK. This is concern about so-called “China risk”.

So why have people begun to go on about risk in relation to China, even though nobody used the term “America risk” in the past when the ROK had a significant economic dependence on the US? This is because China has achieved rapid, high economic growth with an immature market economy structure, so it faces a considerable number of economic uncertainties. A variety of problems are latent in the shadows of its high growth, such as the potential for a hard landing for the economy due to overinvestment, the potential for sharp fluctuations in the renminbi, the problem of bad loans with regard to state-owned businesses and the banking sector, the lack of resources, and growing income disparities.

If such latent risk factors are actualized and the Chinese economy becomes greatly atrophied, exports to China from the ROK will decline and the financial problems of companies that have expanded into China will hit the domestic economy very hard indeed. This, then, could be described as the true nature of China risk.

The greater that economic dependence on China becomes, the greater will be the degree of risk to which the country is exposed, and the question of how to deal with this situation could be said to be a crucial issue for the economy of the ROK. In relation to this, there are two points that we must take into consideration. Firstly, there is the matter of a correct awareness of China risk, and then there is the issue of an appropriate response to this. The reason why a correct awareness of China risk is important is that there is the potential to overreact to changes in the situation resulting from small events in China, and for we ourselves to generate results that will exacerbate the situation. One recalls how, of all markets around the world, it was the ROK’s financial markets that were rocked the most, with sharp declines in share prices, when the Chinese government announced austerity measures in April 2004. In order to prevent the losses that could also occur as a result of excessive reactions to small economic fluctuations in China, a proper evaluation of China risk is required. Consequently, it is necessary to maintain a continuous grasp of the current economic situation in China, which constantly changes as a result of developments in the Chinese government and new policy measures.

If there is a correct awareness of China risk, it should be easier to take measures to deal with it. It is necessary to divide China risk into a number of more closely focused types, and to devise measures appropriate to each type. For example, as the knock-on effects of China’s resource problems and the revaluation of the renminbi differ, the measures to deal with these should also be different. It is necessary to analyze the impact of China risk by industry, by form of overseas expansion and by the region into which companies have expanded, and to strive to develop measures based on this analysis.

[Translated by ERINA]