Korea sees little impact from China's reopening so far

China’s reopening of its economy is having a weaker-than-expected impact on Korea and other neighboring countries, according to a Bank of Korea (BOK) report Monday.

A traveler arriving on Jeju Island from Shanghai receives a welcome gift at Jeju International Airport on March 26. [NEWS1]

China's reopening of its economy is having a weaker-than-expected impact on Korea and other neighboring countries, according to a Bank of Korea (BOK) report Monday.

China's service-centered growth and Korea's growing imports of raw materials for reusable batteries from China are largely responsible for the limited impact.

"China's reopening following its protracted lockdown was projected to contribute to the global economic recovery, but the effect in Korea and other surrounding countries has yet to materialize," the report said.

"China's recovery has centered on service spending since its economic reopening. Imports and exports, which have an external influence, are relatively weak."

Spending on dining, apparel and cosmetics recovered in China following the lifting of the lockdowns. Government support also helped boost the country's infrastructure business.

China's retail sales in the first two months of the year were up 3.5 percent on year, while infrastructure grew 9.0 percent and manufacturing was up 8.1 percent. However, product exports were down 6.8 percent and product imports down 10.2 percent in the same period.

The skewed growth is limiting Korea's exports to China.

Sluggishness in non-IT sectors, including machinery and steel, is easing, but IT sectors, such as chips, remain weak. Korea's trade deficit with China expanded with increased imports of raw materials and reusable batteries.

Growth in IT and manufacturing-reliant countries, like Korea and Japan, improves by an average of 0.13 percentage points for every one percentage point growth of manufacturing-led growth in China, the report said. But the growth weakens by 0.09 percentage points for the same level of growth led by the service sector, the report said.

"Positive impacts from China's reopening have yet to be seen in full swing in not just Korea, but also in other Asian countries like Japan and Taiwan," Kim Sang-hoon, a senior economist at the Bank of Korea, said.

"Exports to China are projected to stay weaker than expected for some time but will gradually recover nearing the second half as sluggishness in IT eases, and China readjusts inventories."

Exports to China have been shrinking for 10 straight months and are on the road to record an 11th. China was Korea's second largest export partner in early April after the United States. Monthly exports to China plunged 31.9 percent this month through April 10 from a year earlier.

The report also noted limited flights between Korea and China and the continued ban on group tours to Korea as other reasons for slowed recovery.

A total of 1,100 flights connecting Korea and China operated weekly before the pandemic, but there were just 62 weekly flights as of the end of February.

Korea reported a $2.4 billion travel deficit in the fourth quarter, projected to expand to $3.0 billion in the first quarter as outbound travelers increase.

BY JIN MIN-JI [jin.minji@joongang.co.kr]