Brace for the China-induced low-growth

The signs of a crisis in the Chinese economy are spreading across various sectors. The so-called ‘China risk’ is emerging everywhere, as deflation concerns are compounded by the risk of cascading defaults in the real estate and financial industries. If China's economy, the world's factory and market, sinks, it will likely cause serious damage to the Korean and global economies. Therefore, we need to prepare for the worst-case scenario proactively.

Real estate, which accounts for 25 percent of China's gross domestic product (GDP), has recently emerged as a risk that threatens the overall economy as a developer default crisis accompanies falling home prices. This liquidity turmoil, which originated from the largest private real estate company, Country Garden, has now spread to the financial sector after affecting companies such as Evergrande Group and state-owned real estate companies, which were at the epicenter of this crisis. In the aftermath of these events, it is anticipated that the Chinese trust industry alone could suffer losses of up to 38 billion U.S. dollars (equivalent to around 50 trillion won) this year. Chinese local governments, which have relied on the sales of land-use rights for government revenues, have also been stumbling as they face a series of defaults.

The problem is that China's economic health, which is expected to withstand the crisis caused by real estate, is also declining rapidly. In July, indicators for consumption, production, and investment all turned unfavorable, and both consumer and producer price indices simultaneously experienced a decline for the first time in approximately three years, sparking fears of deflation. The Chinese economy, already weakened by COVID-19 lockdown and U.S.-led supply chain reorganization, now faces the prospect of a downturn in the real economy. This has led to pessimistic assessments of its economic health, with experts stating that "a 40-year boom has come to an end" and that "a prolonged Japanese-style recession will ensue."

But unlike in the past, Chinese authorities have been unable to introduce a substantial stimulus package. Instead, they have ceased releasing data on youth unemployment, which is undermining their credibility. Recent measures, such as reducing the Loan Prime Rate, comparable to benchmark rates, and issuing approximately 275 trillion won in special bonds to alleviate local government debts, have faced criticism for being insufficient. Moreover, these actions have led to a depreciation of the yuan's value to a 16-year low.

As expectations of China's reopening morph into fears of a 'China shock,' the Korean economy, which relies on China for 20% of its exports, is poised for impact. Exports to China have already decreased for 15 consecutive months, raising concerns about an extended phase of low growth in the range of 1%. In the short term, Korea should support small and medium-sized companies that heavily depend on Chinese exports to mitigate the impact. In the medium and long term, strategies to reduce reliance on China should be pursued through diversification of export markets and products and the development of differentiated technologies. Above all, the time has come to expedite industrial reorganization and implement structural reforms that may have been postponed due to an over-reliance on unique benefits that came from China.