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Boost domestic consumption to cope with China risk

Posted March. 15, 2014 07:01,   


Shanxi-based private steelmaker Haixin Iron and Steel Group recently failed to honor maturing debts. It is the second default of Chinese private companies after Chaori Sola, a solar panel manufacturer, became the first private firm to declare default on February 7. On Tuesday, a Chinese company had its bonds and shares trading suspended due to its deteriorating business performance. Not only financial uncertainties but also real economy indicators are deteriorating in China. The nation’s industrial production in the first two months of the year increased just 8.6 percent year-on-year, lagging behind the earlier projection of 9.5 percent. Growth of retail sales and investment in fixed assets have also sharply slumped this year. Some analysts say that China will not be able to achieve its economic growth target of 7.5 percent for this year.

The global financial market is also on shaky ground in the wake of emergence of economic risks from China and deteriorating political situation in Ukraine. Rumors of an economic crisis originating in Argentina and Turkey are also lingering. Global stock markets, including Asia, the U.S. and Europe, significantly declined this week. Amid a string of negative developments overseas, the benchmark KOSPI index also shed 54.78 points (2.77 percent) over the past week, falling below the 1920 mark on Friday.

Debts owed by Chinese companies amounted to 65 trillion yuan (1.05 quadrillion dollars) as of end-2012. Provincial governments, which have executed excessively for public projects, are also hugely indebted. Companies and provincial governments have depended on "shadow banking" in blind spot of financial regulatory oversight while implementing lavish projects. Critics say shadow banking, which is estimated at more than 40 trillion yuan (650 billion dollars), is a "time bomb that will rock the Chinese economy.” Suspicions over the credibility of official statistics announced by the Chinese government, is another factor of uncertainties.

China is already called “the market of the world,” going beyond “the factory of the world.” If the Chinese economy falls into a crisis in earnest, few countries of the world will be immune to shocks. China is Korea’s largest trading partner, which accounts for one fourth of Korea’s overall export. With Korea’s flagship companies, including Samsung Electronics and Hyundai Motor, struggling amid deteriorating business performance, if "China risk" materializes, ripple-effect will further snowball. The Seoul government should prepare countermeasures to be ready for even the worst case scenario that could arise in China. For Korea to cope with a slowing Chinese economy and global economic slump, it is essential for Korea to expand the scale of domestic consumption so as to help absorb the impact of its slowing export. In this light as well, bold deregulation in various sectors is not a matter of choice, but an issue of survival and death.