Korea to take a hard hit by China decline

With Korea’s economy facing the internal risk of an aging population, the country faces another serious issue at hand that could potentially further weigh down its growth potential -- a slowdown in China.

In a report, Standard & Poor’s warned that Korea will be the third-hardest-hit country by China should the world’s second-largest economy see its annual growth fall to around 3.4 percent from 2017-20.

In this worst case scenario, the aggregate growth rate of Asia’s fourth-largest economy, whose biggest export destination is China, will decline by 6.8 percent, third highest following 8.4 percent for Chile and 7.5 percent for Taiwan in the same period.

This would lead to a series of downgrades in credit ratings for about 60 percent of Korean financial companies and around 50 percent of Korean manufacturers, the global credit rating agency reported.

Concerns over China have been growing with traditional industries such as steel and cement facing overcapacity, and private and state-owned enterprises run the risk of defaulting on their debts, calling for China to launch quantitative easing.

“Anxiety surrounds the perceived unsustainability of credit growth needed to support China‘s (gross domestic product) growth target,” said Paul Gruenwald, S&P Global Ratings’ Asia-Pacific chief economist.

S&P added that China is expected to grow 6.5 percent to 7 percent this year.

However, with most of its economic indicators in April including industrial output and investment showing either moderate or weak growth, China is likely to see its growth decelerate. China’s real estate showed positive growth in April, but was still low compared to the early years of the construction boom.

“The only action that could credibly buoy growth over a long period of time is a massive new round of government stimulus,” commented Brian Jackson, China economist at IHS Global Insight.

“Moreover, we view the recent ‘authoritative figure’ interview as delivering one key credible message -- growth will continue to slow down and then stabilize over a two- to three-year window, rather than rebounding,” he added in his note on China’s economy.

The gloomy forecast for Korea on growing China risk comes after S&P warned Korea of growing risk stemming from its aging population. Global economic agencies, including the Organization for Economic Cooperation and Development, have been urging Korea to come up with measures to deal with the aging population as it is expected to further slow Korea’s productivity and increase social spending.

Korea’s Finance Minister Yoo Il-ho had indicated that it could seek extra spending if China’s growth falls to around 5 percent.

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