By Jhoo Dong-chan
Concerns are mounting over a possible hard landing for China as the world's second-largest economy continues to lose growth momentum amid its prolonged trade feud with the United States.
Economic experts have warned that if Beijing experiences a hard landing, which is widely defined [for China] as an annual GDP growth rate of less than 6 percent, it will deal a fatal blow to Korea's economy that depends heavily on the neighboring country.
In a report on the Chinese economy, the Korea Development Institute (KDI) suggested that Korea would suffer an estimated 0.3 percentage points decline in economic growth if the U.S. imposed heavier import tariffs on Chinese products.
According to the KDI report, China's growth rate has been falling this past year, standing at 6.4 percent in the first quarter, 6.2 percent in the second and 6 percent in the third.
"China's economic situation has deteriorated since the global financial crisis in 2007. The country could suffer a double whammy if Washington imposes more tariffs on Chinese imports," KDI researcher Kim Seong-tae said.
In August, U.S. President Donald Trump announced a plan to impose additional tariffs on $300 billion worth of Chinese imports. In response to Washington's offensive, the Chinese government said it would impose retaliatory tariffs on American imports.
It is still unclear whether the world's two largest economies will indeed engage in a trade war through tariffs since Washington and Beijing restarted trade talks last month.
"One thing is clear. China will suffer more than the U.S. if they engage in a trade war in earnest. China is also Korea's largest trade partner. This will also bring an adverse impact to Korea's economy," Kim said.
"China's exports to the U.S. will obviously decline if Washington imposes additional tariffs on Chinese goods. This will cause a negative impact on income per capita as well as demand in China. Korea's exports to China will, of course, suffer if Chinese consumers make and spend less money."
The KDI data suggest China will suffer a 1.06 percentage point decline in economic growth if the two economies engages in a trade war, compared to 0.09 percentage points for the U.S.
"The global economy will experience a 0.2 percentage points decline in growth if the two titans clash. Korea's economy is estimated to decline 0.34 percentage points," Kim said.
"The KDI outlook includes not only existing import tariffs on goods from the two countries but also possible additional duties both governments said they will impose in the future. Korean firms could export more if its U.S. and Chinese rivals suffer from the possible trade war."
The Hyundai Research Institute (HRI) agreed.
"China's growth rate has continuously declined over the past year. It won't maintain its current 6 percent growth rate next year," the HRI said in a recent research paper.
"China's economy is likely to face a long-term recession under the current economic structure rather than a hard landing. It is promoting the country's financial and services sector to overcome the current slowdown. The Korean government should study possible risks caused by China's slowdown."
Daishin Securities analyst Moon Nam-jung said the ongoing trade talks between Washington and Beijing could end up in a stalemate.
"Trump is utilizing the Sino-America trade issue to water down the domestic movement for impeaching him," Moon said.
"The current talks could go south anytime in November. Risks are still there."
Kim of the KDI said Chinese firms' profitability is also deteriorating rapidly while corporate delinquency is surging, making the country extremely vulnerable to external factors.
"An increasing number of Chinese firms have posted a deficit. Chinese firms' return on total assets now stands at below the 3.5 percent level. About 40 Chinese conglomerates went into default in the first quarter of the year," he said.
"The country's banks are also facing growing suspicions about their financial soundness. Twenty eight Chinese banks have yet to finalize their 2018 regulatory filings. A number of lenders, especially provincial ones, went bankrupt over the past year."
According to a Computer and Enterprise Investigations Conference study, Chinese banks' net interest margin has crashed below the 2.2 percent mark. The country's corporate bond default ration also skyrocketed by four times in 2018 compared to the previous year.
The KDI said, however, that the Chinese government still has the leverage to hedge possible risks considering its low GDP-debt ratio as well as solid foreign exchange reserves.
It pointed out that China's GDP-to-government debt ratio is still stable at 49.8 percent, and foreign exchange reserves totaled $3.1 trillion as of the end of September.
"It is still believe to have room for quantitative measures to boost the economy, but this will increase household debt. We need to see how the situation develops."
Kim called for the Korean government to implement a more accommodating monetary policy while expanding government spending to boost the nation's economy.
"I don't think China's economy will suddenly crash to a crisis level, but the nation's current slowdown will influence not only neighboring countries like Korea but also the global economy. It is worth monitoring for a while," he said.
"The government should come up with measures to eliminate regulations and get rid of insolvent companies to improve the nation's economic condition in a bid to counter external factors."