“China Shock” Deals a Blow to Domestic Economy

As Chinese Premier Wen Jiabao announced a retrenchment policy and China’s financial authorities ordered a freeze on new bank loans, stock prices in major countries, including the U.S., declined sharply, shaking the world economy.

The Korean economy, which has recently suffered a crunch in domestic demand, feared stagnation in export following the collapse of China’s bubble and displayed a hypersensitive response to the significant stock market slump with a sharp increase in the won to dollar exchange rate.

Meanwhile, international oil prices jumped to a record high in 14 years. The Korean economy is expected to suffer from the pressure of inflation, with the deterioration of consumers for export companies and other internal and external problems.

The composite stock price index in the Seoul stock market fell 26.42 (2.93%) points to 875.41 between Wednesday and Thursday. The KOSDAQ also fell 22.66 (4.73%) points, closing at 456.04.

Foreigners sold the largest portion of the 773.3 billion won of stocks sold for the day, selling more than one trillion won of stocks in the past four days alone.

The U.S. stock market also dropped on Wednesday as a result of the statement made by Premier Wen Jiabao and broke the NASDAQ 2000-level, dropping more than 2%.

Stock prices in the U.S., Europe, and South America all fell on Wednesday, while Hong Kong, Singapore and other Asian stock markets were also unable to counteract Thursday’s weak stock market.

When foreigners sold stocks, opting out of the Korean stock market due to “China shock,” the won to dollar exchange rate soared (depreciation of won value) and jumped to 1170 won-level for a dollar.

The won to dollar exchange rate jumped 14.3 won and closed at 1170.7 won per dollar in Seoul’s foreign exchange market.

Meanwhile, during a conference with Reuters on Wednesday, Premier Wen Jiabao stated, “There is a need to cool down China’s fast-growing economy to curb inflation,” reiterating his support for the severe policy.

Quoting statements made by officers from Beijing and Shanghai banks on Thursday, the Asian Wall Street Journal reported that financial authorities ordered banks to cease lending entirely this weekend.

According to Korea National Oil Corporation, Middle East Dubai oil traded on Wednesday climbed 0.45 dollars to 33.18 dollars a barrel from the previous day, following an unstable political situation and hitting a record high record since October 16, 1990, right before the Gulf War.