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International Economics

Research Monograph

Structural Changes of the Chinese Economy and New Opportunities for Korea (Volume 2)

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SUMMARY Since the reestablishment of diplomatic relations between Korea and China in 1992, the two economies have become increasingly interdependent and mutually beneficial. The robust growth of the Chinese economy was a major force behind Korea’s successful recovery from two major economic shocks within a decade —the Asian Foreign Exchange Crisis in 1997 and the Global Financial Crisis in 2008. Nevertheless, as Chinese firms aggressively grapple for Korea’s export market shares and diminish profit margins, China starts to be reckoned as a threat for Korea. Further, its recent slump has been deemed as risk factor for Korea. The rapid cooling off has already exerted some adverse effects on the Korean economy.

So, what is the current state of the Chinese economy and how much has the economic relationship between the two countries changed? How should we view the hardships of Korea’s industries incited by the massive expansion of China’s shipbuilding, steel, and chemical industries? What are the real causes for the demise of Korean industry? Why is the Chinese economy experiencing a simultaneous collision of overinvestment, instability and slow growth? Will China’s renewed efforts for structural reform, exemplified by the ‘New Normal’ and ‘Chinese Manufacture 2025,’ be successful and if so, what are the implications for the Korean economy? How should the trade relationship between Korea and China change in the future? What strategy should Korea employ if it is to benefit from China’s transition from manufacturing to services and from an export-driven to a domestic demand led growth? This report will try to answer these questions, albeit possibly imperfectly.

Just as China’s industrial overcapacity is behind Korea’s shipbuilding and steel industry crises, China’s structural problems are behind their overinvestment. And in order to correctly understand the relationship between the two economies, one needs to follow China’s economic transformation itself. Accordingly, this study takes a multi-dimensional and holistic approach and deals with not just trade relationship but also the evolutions and shifts in the structure, competition laws, and the consumer market of China’s economy as understanding the changing relationship between Korea and China and its implications necessitates broader analysis.

This report is the output of a team research project conducted by the KDI Department of Industry and Service Economy in 2015, participated by ten team members and seven outside contributors. Initially, the research was motivated by the presumption that the Chinese economy has become a threat for Korea’s industries. Indeed, the technological gap that Korea has enjoyed has quickly disappeared and in several areas, China currently produces far more sophisticated goods. Naturally, this report puts more weight on the competition relationship than on the macro interdependency of the two economies. As the project progressed, however, another facet of the relationship, i.e. the Chinese economy becoming a risk factor for the Korean economy, presented itself as it became clear that the slowdown in China’s growth in 2015 was larger than expected. Korea’s real export growth in 2015 registered the lowest level with 0.8% since hitting -0.3% in 2009 in the midst of the global financial crisis. Exports to China fell by 5.6% in current dollars, accounting for the majority of the drop.

As this report shows, Korea and China have developed an even more interdependent and mutually beneficial relationship as the two geographically close economies successfully maintained high economic growth. And because they took on similar growth strategies, they have also become fierce competitors in many fields. But, intra-regional trade has grown even faster, revealing that the relationship has been a mutually beneficial one. The current problems in both countries’ industries have been created from within and the risk factor aspect is a direct consequence of interdependency.

The Chinese economy is steadily and methodically marching towards becoming a manufacturing giant, conducting systematic experiments and trial-and-errors, and exploiting its vast domestic market to overcome the disadvantage of being a late-comer. However, it is not free from its own constraints as a big country and is subject to socialist rigidities. The current over-capacity and investment overlaps are consequences of this, as well as a lack of coordination. On the other hand, Korea is faced with spatial limitations of a small domestic market and a lack of time to experiment as advanced countries did in the past. However, as a small country, it has a flexible and agile economy with a high degree of social integration which makes policy manuvers feasible. Therefore, if China’s growth and structural transformation is to become an opportunity, the Korean economy should be able to create an open and flexible system and maintain institutional superiority over a big country. And the society’s ability to resolve conflicts of interest during industrial restructuring and deregulation is the key.
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