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Beijing shifts focus of economic policy to 'innovation, efficiency'
By Kim Jae-kyoung
Over the past weeks, China has gained global attention after it erased presidential term limits from its constitution, paving the way for Chinese President Xi Jinping to stay in power indefinitely.
The move overshadowed another important decision on China's economic reform at the same annual party meeting, which could have far-reaching repercussions on Korea's economy and major enterprises.
With the aim of becoming the world's dominant economic giant by 2050, Bejing made it clear it will ditch its aggressive expansion strategy and pursue quality growth.
This means China will shift the focus of its economic policy to "innovation and efficiency" from the old quantitative growth model by cutting reliance on stimuli.
The policy shift is expected to reinforce Chinese firms' attempts to move up the value chain, positing serious threats to Korea's leading manufacturing and tech firms.
"This is a major challenge. China is imitating both Japan and Korea by moving to higher value-added products and technologies," Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, told The Korea Times.
Antonio Fatas, a professor of economics at INSEAD's Singapore Campus, echoed the view. "China is a large and fat growing economy that will challenge South Korea at a level it could not do earlier," he said.
"The only way to fight this is to continue running and innovating to stay ahead. There is no magic bullet here."
According to a recent report by Natixis, the trade relationship between China and Korea has evolved over time from very complementary to one that is increasingly competitive.
The French bank said China's rapid move up the value chain has started to dent Korea's comparative advantage in high-tech products.
"Chinese companies are increasingly competitive with Korean firms," said Troy Stangarone, senior director at the Korea Economic Institute (KEI) based in Washington.
"They are growing closer to Korean firms in terms of technological sophistication, and despite rising wages China still has a labor cost advantage over Korean firms."
The experts said that in order to maintain its lead, Korean companies must beef up efforts to enhance innovation.
"To remain competitive, Korean firms will need to increasingly move towards greater innovation and push for stronger intellectual property protections internationally to maintain an advantage over Chinese firms," Stangarone said.
Guillen said, "Korean firms need to continue innovating. Domestically, invest in education, facilitate entrepreneurship, and don't try to save companies if they make mistakes."
China's reform of its economic model was designed to transform the country into the world's top economy by upgrading industries at the macro level and improving the efficiency and output of individual companies at the micro level.
In particular, it seeks to encourage Chinese firms to further develop advanced sectors, such as artificial intelligence, in a bid to create a digital economy.
"We are big but not strong enough," China's Commerce Minister Zhong Shan said in a press conference on the sidelines of the annual plenary session a week ago.
"We aim to stabilize our position as a big trading nation by 2020, turn into a strong trading nation by 2035 and finally become an economic and trade giant by 2050."
Experts said Korean firms need to adopt a more prudent strategy when investing in China or having dealings with Chinese players, given that the authorities there treat foreign players unfairly for the sake of their national interest.
"Chinese companies often compete with an unfair advantage created by government subsidies and other support intending to create Chinese control over technology and markets," said Jeffrey Jones, an international lawyer at Kim & Chang.
He urged companies and governments in all countries to watch this vigilantly and seek a transparent, fair and honest approach to doing business with the Chinese.
"It is often difficult to resist the large sums offered by Chinese buyers for technology and markets, but for the long-term survival of other economies, greater attention needs to be given to transactions with Chinese companies, particularly when it comes to acquisitions," he said.
In order to minimize the side effects of China's transition, Korea and its firms should cut their reliance on China while developing alternative markets.
"China has shown it is not a reliable trade partner with too many unfair trade practices," said Sohn Sung-won, an economics professor at California State University-Channel Islands.
"It is important not to alienate the U.S., which has both economic and security implications. Korea should decrease its trade dependence with China and increase its ties with the U.S. and other countries throughout the world."
