Two economies in a pod

We need a long-term policy for the country, not just empty words.

Kim Chang-gyu

The author is an economic news editor of the JoongAng Ilbo.

During a fundraising event on Aug. 11, U.S. President Joe Biden likened the Chinese economy to a “time bomb,” citing China’s slowing growth, high unemployment rate, and fast aging population. “So, they’ve got some problems,” Biden said. “That’s not good because when bad folks have problems, they do bad things.” Some defined it as an impromptu remark with a political intention, but the Chinese economy clearly is shaking.

China is in crisis. The three pillars that support its economy — exports, domestic consumption, and the real estate market — are wobbly. The United States is also joining forces with other major countries to pressure China. In October last year, the United States began controlling its exports of high-tech semiconductor equipment to China for security reasons. The “Belt and Road” initiative — a 10-year-old campaign to create land and maritime silk roads linking China, Central Asia and Europe — also has some cracks. Italy, the only participant of the initiative among the Group of 7 countries, is considering withdrawing as tension builds between the United States and China.

The biggest problem is China’s real estate market. Beijing has been doing its best to save it over the past year, but the festering market is on the verge of collapse. Over the past few decades, China’s economy has grown by leaps and bounds based on investments in infrastructure and real estate. But due to the snowballing debts and inefficiency, the Chinese government in 2020 strengthened regulations to lower skyrocketing housing prices by ordering real estate developers to lower their debt ratio. They prospered by relying on loans, but could not withstand the pressure. A number of construction projects were halted, while property prices plummeted with the onslaught of the Covid-19 pandemic.

As consumers began to tighten their wallets due to the real estate slump, the Chinese economy fell into deflation. In July, China’s consumer price index (CPI) and producer price index (PPI) fell 0.3 percent and 4.4 percent, respectively, compared to the same period of last year. A drop in prices means an increase in the burden on companies — and lesser income and lesser jobs for consumers. On top of that, exports continued declining every month. In May, it fell by 7.5 percent on year, 12.4 percent in June, and 14.5 percent in July. After the youth unemployment rate reached a record high of 21.3 percent in June, Beijing abruptly stopped announcing the numbers from July.

For its geographic proximity, Korea is bound to be influenced by China. The problem is its heavy reliance. China made up 25 to 26 percent of Korea’s exports over the past five years, but in the first half of this year, it fell to the 19 percent range in the aftermath of the pandemic and China’s recession. Yet China is still the largest buyer for Korea. The United States made up 11 to 15 percent of Korea’s exports, but accounted for 18 percent in the first half. An economy overly relying on a certain country deepens its instability. This is why we need “de-risking” to lower dependence on a specific country.

In a recent article titled “China’s 40-Year Boom is Over. What Comes Next?”, the Wall Street Journal concluded that China’s growth model based on infrastructure investments and construction is no longer sustainable. The article predicted that China’s growth rate will slow down due to over-the-top and overlapping investments from regional governments — which have caused massive debts — as well as a population decline due to low birthrates and conflict with the United States. Some experts said China may follow the path Japan has taken since the 1990s.

What about Korea? More and more money is flowing into the real estate market. At the end of July, the balance of household debts in the banking sector hit an all-time high of 1,068.1 trillion won ($800 billion). This is because it became easy to take out loans as banks offer 50-year maturity loans one after another.

As a result, real estate prices of popular areas are going up, while prices of unpopular areas are sinking, making the rich richer and the poor poorer. Debts are propping up the real estate market in Korea.

As of the end of the second quarter, the delinquency rate for those in their 20s or younger topped 0.44 percent, the highest ever. Last year, Korea’s total fertility rate was 0.78, the lowest in the world. The situation is more serious than China’s fertility rate of 1.09. Moreover, Korea’s economic structure is vulnerable to external factors. But the government is only paying attention to the shower without preparing to deal with a typhoon. We need a long-term policy for the country, not just empty words.