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Debt-ridden economy becomes more vulnerable to shocks
By Lee Kyung-min
Voices are growing that Korea should brace for China's economic crisis as the world's second-largest economy has become more vulnerable due to a myriad of challenges both at home and abroad.
Snowballing debt has been weakening China's economic fundamentals, while the deepening U.S.-China trade feud coupled with the rising U.S. interest rate-triggered foreign capital flight are destabilizing the financial market.
Market experts say that China could be the epicenter of the next financial crisis because external shocks could deal a fatal blow to the debt-ridden economy.
They warned that if the Chinese economy crumbles, it could spread rapidly and topple emerging markets, inevitably and irreversibly hurting the export-reliant fourth-largest economy in Asia.
"From the debt perspective, China is now on worse footing than the U.S. during the 2008-2009 global financial crisis," said a senior consultant at a global consulting firm, asking not to be named.
"Given its debt level, it is probable that China will face a crisis if trade confrontations between the U.S. and China further escalate and develop into a currency war," he added.
China's national debt-to-GDP ratio has reached around 260 percent.
The figure is nearly double the average of emerging and developing economies, according to the Organization of Economic Cooperation and Development (OECD).
A report from the International Monetary Fund (IMF) in April said China accounted for 43 percent of the increase in worldwide debt since 2007, with global debt standing at $164 trillion, or 225 percent of the global GDP in 2016.
"Concerns over China's mounting debt began over a decade ago," said Park Hae-sik, a senior researcher at Korea Institute of Finance.
"The record-breaking ratio continues to be at historic highs for about over ten years now. Lingering problems include not only debt, but credit default as well as a property bubble, all of which undermines the country's financial health."
The international organization warned against "shadow banking," or lending by non-financial entities including peer-to-peer lenders and micro-financing, which grew since the 2008 global financial crisis. The non-traditional way of financing has been cited as a main culprit of the debt increase.
Worse yet, China recorded a current account deficit of $28.3 billion in the first half of 2018, a first in 20 years. Its current account surplus has been steadily shrinking since the 2008 crisis to 1.3 percent of GDP in 2017 from 9.9 percent in 2007.
"China is Korea's largest trading partner importing a fourth of our products, most of which are intermediate goods undergoing refining before being sold by the former to the world," said Sung Tae-yoon, an economist at Yonsei University.
"Korea should seek to diversify markets in the long term, but as of now, it has limited options other than to continue its reliance on China, where the largest number of Korean companies is based."
The U.S. interest rate hike could spark foreign capital outflows from China, which could, in turn, lead to a sell-off of U.S. bonds, thereby weakening dollar values, a highly "frightening" scenario.
"By selling off U.S. bonds en masse, China can shake the U.S. currency, thereby not only strengthening its yuan but also recover the deficit from its trade dispute with the U.S.," Kim Yong-ick, a professor of macroeconomics at Sogang University, was quoted as saying in his recent book.
In 2016, China recorded $725 billion in capital outflows, due chiefly to the strong dollar against the yuan. It fell 0.12 percent to 6.9227 per dollar in Shanghai Oct. 16, slumping 9 percent in the past six months.
China's foreign currency reserves also fell in September amid concerns of capital outflows and further depreciation of the yuan. Its foreign reserves fell to $3.087 trillion, down 22.69 billion from 3.11 trillion a month earlier.
While the world economy is generally safer than it had been in the decade after the 2008 crisis, Korea should strengthen its fundamentals and map out a long term plan to bolster its economy, Park said.
"The emerging markets have conducted structural reforms over the past years against possible external shocks following a sobering experience in 2008. It will be an unending task for Korea to continue efforts to strengthen fundamentals and diversify its portfolio to explore new markets and produce new goods and services," Park said.
Fears of additional U.S. rate hikes and worsening U.S.-China trade disputes have taken a toll on global stock markets, many of which plummeted amid heightened volatility following fears about diminished corporate earnings due in large part, but not limited to, duties put on each other's goods.
The Shanghai composite slipped by 1.49 percent Oct. 15 and closed at around 2,568.10, the lowest since November 2014. China's stock market gauge fell near 20 percent in the past six months due to the tension and an expected economic slowdown.
Korea's benchmark KOSPI plunged 4.4 percent to close at 2,129.67, Oct. 11, the lowest since April 12. While it rebounded 1.51 percent the next day, but the bourse again lost 0.8 percent three days later, with many local experts expecting the downward trend to continue for the time being.
