Korean companies urged to ditch Chinese investments

Korean companies need to reduce their investment holdings or offload their shares in China amid unfavorable geopolitical conditions, according to the Korea International Trade Association (KITA) on Tuesday.

Korea International Trade Association's Vice Chairman Jeong Marn-ki speaks at a press briefing at Trade Tower in southern Seoul on Tuesday. [KITA]

Korean companies need to reduce their investment holdings or offload their shares in China amid unfavorable geopolitical conditions, according to the Korea International Trade Association (KITA) on Tuesday.

China-bound investment from Korea is diminishing each year, following a broader investment trend as global markets shift away from China.

The U.S.-China trade war has led the United States to strengthen regulations against China, especially in the sector of advanced technology as shown by the Chips and Science Act and the Inflation Reduction Act.

KITA data shows that China’s share of U.S. imports hit its peak in 2017 at 21.6 percent and dwindled to 13.9 percent in 2023.

Foreign direct investment (FDI) from January to November 2023 dropped 10 percent to 1.04 trillion yuan ($146.5 billion) compared to the same period the year before.

The proportion of greenfield investments in China also fell to 1.5 percent in 2022 from 2018’s 11.6 percent, while investments in Indonesia and Mexico have been on the uptick.

“The reasons why FDI in China fell are threefold: China’s attractiveness as a production base fell due to cost increases in human resources and manufacturing, U.S. enforcing heavy tariffs on China, and multinational companies no longer hold the superior position compared to Chinese companies as they quickly progress to meet consumer standards,” said KITA’s Vice Chairman Jeong Marn-ki at a press briefing in southern Seoul on Tuesday.

Cho Sang-hyun, the head of KITA’s Institute for International Trade, said that strong trade sanctions against China from the United States during the Trump and Biden administrations helped Korea to preserve its market superiority in key items, such as semiconductors.

"Strong regulations from the U.S. have kept China at bay," Cho said. "Investment trend is shifting and Korean companies need to make their choices as well.

“The choices are again, threefold,” said Cho. “Companies will either exit China, or choose to maintain their occupancy in China without expanding their market share, or lastly, go all in. In the case of the latter, they will attempt to erase the image that they are Korean companies, and even go as far as to take the minority share in joint ventures they form with Chinese companies to survive in the Chinese economy.”

Meanwhile, KITA projects that global demand for IT products — including chips, solid-state drives, telecommunication devices, displays and household products — which have dwindled since the Covid-19 pandemic, will rise again.

Korea’s export volume for IT products to the United States from January to November fell 12.1 percent on year, while for China it fell by 15.1 percent on year. For non-IT products, the volume only fell 4 percent and 3.4 percent respectively.

“Korea’s ranking for export volume for the January-September period in 2023 fell to No. 8 from No. 6 in 2022, but recovery in IT demand will lead the country to move into No. 7 or possibly, No. 6, this year,” Jeong said.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]