Holding off financial shockwaves from China

The government must address the Chinese risk with utmost urgency and come up with practical strategies.

The storm from China — the weakening of the world’s second-largest economy and the spread of financial-sector risks — is hitting the Korean economy. Warning signs started to appear on the demand front in China. Retail sales grew 2.5 percent in July, far below the expectation of 4.5 percent. Industrial output added 3.7 percent, slowing from the 4.45-percent gain in the previous month.

The real estate market that makes up a quarter of China’s GDP is sinking deeper and deeper. Real estate investment in the first seven months of the year fell 8.5 percent from a year ago. New construction tumbled 24.5 percent.

The sluggishness in the real estate market has rolled over to the financial sector. The domino collapses — Evergrande Group’s filing of bankruptcy in New York, debt defaults by public developers such as Kasia, Fantasia, and Shimao Group, and private real estate giant Country Garden teetering towards default — are accompanied by the shadow-banking woes with Zhongrong International Trust missing payments on 350 billion yuan ($47.9 billion) worth bonds. The contagion is raising alarm about a Lehman-like crisis in China.

But Beijing has been unable to come up with quick stimuli. The delay in announcing jobless rate for young Chinese raised suspicion and doubts for foreign investors. A slowdown in the Chinese economy accounting for 18 percent of the global GDP could have a serious impact on the Korean economy. China makes up 20 percent of Korean exports. The 10-month losing streak in Korean exports owes much to the 14-month contraction in its shipments to China.

The shocks have hammered the Korean financial market. The Korean won lost about 6 percent against the U.S. dollar over a month. The Kospi could fall under 2,500.

Whether our financial authorities have a contingency plan is doubtful. During last week’s meeting among economy-related ministers, Deputy Prime Minister for the Economy Choo Kyung-ho ordered structural fixes through diversification in commodity items and export destinations. But the government is only reciting the textbook theory of market diversification while the Chinese risk has been raised for a long time. The government must address the Chinese risk with utmost urgency and come up with practical strategies. It must hold off financial shockwaves from China at all costs.