[Weekender] Seoul, Beijing set for further economic integration

Once foes and now friends, South Korea and China have become closer than ever, with bilateral trade increasing rapidly.

Korea’s shopping districts and tourist sites ― notably Myeong-dong in Seoul and Jejudo Island ― are filled with Chinese-speaking guides and banners welcoming the largest group of visitors to the country, who are helping Korea reduce its prolonged services deficit. Some 4.3 million Chinese visited Korea last year, and the Korea Tourism Organization expects 5 million this year.

More and more students are opting to go to China to study its language and business culture to brace for a fast-approaching era of stronger ties between Seoul and Beijing, with a bilateral free trade agreement likely to be sealed later this year.

Many analysts paint optimistic outlooks for the bilateral free trade to spur growth in Korea’s IT, chemicals and machinery industries, which account for a large share of its exports to the world’s most populous country.

“Korea’s population is much lower than the minimum 90 million needed for any country to sustain domestic consumption,” said Kwak Hyun-soo, an analyst at Shinhan Investment.

“To this end, exports will inevitably have to continue to be Korea’s core growth engine.”

Further economic integration between Seoul and Beijing would benefit the high-tech sector, as the world’s second-largest economy seeks to shift to innovation from manufacturing by developing key industries such as new energy and information technology.

The FTA will also pave the way for more cultural exchanges, with Seoul and Beijing likely to pursue more joint ventures in arts and content production.

The free trade agreement, along with Seoul’s increased access to Shanghai’s capital market, is expected to integrate both economies and bring them to a level similar to China’s economic relations with the U.S. and Africa, which many analysts have described as “Siamese twins.”

With China boosting its presence worldwide both geopolitically and geoeconomically, the renminbi is also rapidly catching up with key G3 currencies ― the U.S. dollar, the euro and the Japanese yen ― to become a viable trade currency.

Although the yuan only takes up about 1 percent in the global forex market, the use of Chinese money for trade with its partners reached 4.65 trillion yuan ($753 billion) in 2013, up from 510 million yuan in 2010.

The dollar remains the top currency for trade, accounting for more than 80 percent, followed by the yuan, which surpassed the euro as a trade currency last year. Standard Chartered Bank forecast that more than 28 percent of global trade will soon be conducted in yuan.

Analysts said Korea, which agreed with China to set up an offshore clearing center for direct won-yuan transactions, has the potential to become one of the world’s hubs for yuan trading.

“The country has a competitive edge over countries such as the United Kingdom and Australia, which have set up clearing centers ahead of Korea, as Asia’s fourth-largest economy trades more with China than those two economies do,” said Han Beom-ho, an analyst at Shinhan Investment.

By Park Hyong-ki (hkp@heraldcorp.com)