S. Korea ups guard against US-China trade tensions

South Korea’s fiscal chief on Monday warned that the economy may have become more vulnerable to the escalating trade conflicts between the United States and China, apparently shifting from his previous optimistic tone.

He also vowed to take “appropriate measures” to stabilize the financial markets when necessary, hinting at the possibility that the government might expand its involvement in foreign exchange to defend the value of the local currency.

“There is a possibility that the impact of the intensifying US-China trade conflicts may be more serious,” Deputy Prime Minister and Finance Minister Hong Nam-ki said in an emergency meeting of economy-related ministers.

“The government will make efforts to minimize the consequences on our economy under any given circumstances.”

He also urged the National Assembly to pass the pending supplementary budget bill of 6.7 trillion won ($5.6 billion), which includes special trade finance funds for exporting firms.

Hong had earlier displayed confidence over Seoul’s economic resilience and optimism concerning the Washington-Beijing power struggle.

“It appears that the US-China trade conflict will eventually cool down,” Hong had said last month when he visited Washington, DC, for the G-20 financial ministers’ meeting.

Even when the nation’s economy signaled a downturn earlier this year, he maintained a sanguine tone, claiming that the economic situation will “improve in the second half of the year.”

According to data released by the Bank of Korea and the Organization for Economic Cooperation and Development, Korea’s economic growth in the first quarter of this year shed 0.34 percent from the previous quarter. This on-quarter growth pace was the lowest among the 24 OECD member states subject to the latest survey.


“In mature economies where the potential growth rate is in the 2 percent range, the on-quarter GDP growth may temporarily flinch once in a while,” said Park Yang-soo, director-general of the BOK’s economic statistics bureau.

Despite the central bank’s explanation, however, the figure boosted anxiety in the market as the world’s two largest economies are showing no signs of ending their trade war and Seoul’s exports have shrunk for the fifth straight month in April.

As Hong vowed to take “appropriate stabilizing measures” when necessary, speculations rose that the authorities may expand leverage in the forex market, despite counterpressure from Washington.

The local currency closed at 1,194.20 won against the US dollar on Monday, up 1.5 won from the previous closing when it had marked a 28-month low.

But the central bank once again dismissed the talks on redenomination, which refers to the change of the face value of won from 1,000 per US dollar to 1.

“Never have we considered, neither do we have plans to carry out redenomination,” BOK Gov. Lee Ju-yeol said.

“The US-China trade tensions continue to be uncertain. We will closely watch developments and address the issue after a monetary policy board meeting slated for (May) 31.”

By Bae Hyun-jung (tellme@heraldcorp.com)