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Assessment and Implications of the Recent Instability in the Chinese Economy

Seong Tae Kim, Kyu-Chul Jung 2015/11/09
Assessment and Implications of the Recent Instability in the Chinese Economy
Kim Seong Tae, Fellow at KDI
Kyu-Chul Jung, Fellow at KDI

Summary and Policy Implications

■ Restructuring overinvestment is unavoidable for China, which will likely drag down Korea’s growth in the long-term.
○ If China makes a hard landing in the process, it will increase and expand the negative impact on Korea’s key industries, weakening the overall pace of growth.

■ In this context, Korea must be well prepared for all contingencies by maintaining macroeconomic stability and strengthening financial prudence, while enhancing its internal flexibility so that prompt and effective responses will be available when external conditions change.
○ The foreign exchange rate adjustment based on supply and demand conditions is the primary buffer against external shocks, hence it is important to sustain its elasticity.
○ Fiscal policies should be focused on strengthening prudent management to sustain Korea’s national credibility while monetary policies should take domestic conditions such as economic activity and inflation into account, together with active responsive measures for unexpected shocks.
○ Korea must block the negative external shocks from spreading across the nation by accelerating the process to liquidate insolvent companies and slowing down the steep rise in household debt.

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