`Korea too reliant on Samsung, Hyundai, needs o`seas investment`

`Korea too reliant on Samsung, Hyundai, needs o`seas investment`. July. 19, 2012 07:31. abc@donga.com.

"Real estate prices have risen in Korea but demand will remain subdued due to the aging population. A danger of a bubble exists. Household debt has risen too much for further government policies to work. The economy needs a boost from active outward investments."

So said Andy Xie, former chief economist for Morgan Stanley, in an interview with The Dong-A Ilbo Wednesday at Lotte Hotel in central Seoul. He said the Korean economy will show moderate growth, but as a small open economy, it will inevitably be affected by the global economic downturn.

A Chinese economist known for predicting economic bubbles, Xie was in Korea to attend a conference hosted by the Korea Institute of Finance. He predicted the Asian currency crisis in 1997, the dotcom bubble in 1999, and the U.S. subprime mortgage crisis and the collapse of Lehman Brothers in 2008.

He urged Korea to use surplus capital to invest in overseas assets to prevent a real estate bubble and solve the growing problem of household debt stemming from excessive capital inflow into the housing market. He added that monetary and fiscal policies will have limited effect.

Japan locked in surplus capital in the country, prompting the yen`s appreciation and an increase in costs, which in turn resulted in a sluggish economy, Xie said, and urged Korea not to make the same mistake. He referred to the Government of Singapore Investment Corp., which made active overseas investments to stabilize the country`s foreign exchange market.

Another risk factor for the Korean economy, Xie said, is its excessive dependence on Samsung Electronics and Hyundai Motor.

Nokia`s failure to read global trends led to the faltering of the Finnish economy, he said, and Korea could also suffer a similar fate. He proposed Korea strive to enhance the competitiveness of at least 10 other companies.

Xie predicted that it will take two to three years for the global economy, including that of China, to recover. Major central banks will print more money and stimulate inflationary pressure, but as the economy remains stagnant, there is the risk of economies experiencing stagflation. Warning of the risk of the Chinese bubble bursting, Xie said there is no short-term remedy.

China had pursued growth led by manufacturing but shifted to speculation from production in 2004, which led to a massive capital flow into the non-productive real estate sector, in turn which generated a huge bubble. Sluggish real estate transactions will hamper cash flow and lead to the bubble`s collapse this year, he added.

The Chinese economy will need two to three years to recover but will still make a soft landing. he said, but added that a soft landing is not the best remedy since it will sustain marginal companies and delay economic recovery, something which will lead to the inefficient distribution of resources.

China should shift from its manufacturing focus to public sector reform for self-sustaining growth, he said.