Lessen the spillover from China’s economy

The government must reinforce policy support in products where Korea holds a technological edge to back companies to keep up their competitiveness through research and development (R&D) efforts.

The People’s Bank of China (PBOC) has cut its loan prime rate (LPR) — the de facto benchmark interest rate — by 25 basis points. The lowering of the oneyear LPR charged on personal loans provided by commercial lenders as well as the five-year rate guiding mortgages comes as a part of a stimuli package to jump-start the weakening economy. The central bank is expected to follow up with more easing moves by lowering the reserve requirement ratio (RRR) it mandates for commercial lenders to deposit in the bank to fuel ammunitions for lending.

China’s economy has been calling for urgent policy actions. Data last week placed the country’s economic growth at 4.6 percent in the third quarter against the same period a year ago, the slowest in six quarters, which challenges the government target of an annual growth of “around 5 percent.”

The economy has been faltering since the second quarter with domestic demand being weighed down by the real estate slump that accounts for about a quarter of the country’s GDP. Exports also have been losing steam, and the inflation rate has been mired below 1 percent for eight consecutive months, flagging deflationary warnings. At this rate, the economy could perform worse next year.

The slowdown of the world’s second largest economy spells trouble for the global economy as well as the domestic economy. China remains our primary trade partner, although trade balance has shifted to the red. From January to September this year, South Korea’s exports to China totaled $97.87 billion, accounting for 19.2 percent of its total export during the period.

The country relies heavily on China for its shipments of chips — the mainstay export. Moody’s Analytics has warned that the reduced factory output of China could threaten the exports of high-tech intermediate goods from Korea, Japan and Taiwan. A weakened China will make it hard for Korea to meet the government’s export target of a record $700 billion this year. The government and industry must join forces to build a long-term strategy against the so-called China shock. China’s share in exports cannot come down at once, given China’s economic scale. But Korea must thoroughly examine the risk of China in the middleincome trap and consider increased localization and self-sufficiency in manufacturing to ready countermeasures.

The government must reinforce policy support in products where Korea holds a technological edge to back companies to keep up their competitiveness through research and development (R&D) efforts. It must diversify export routes to gradually wean off China to lessen the spillover from the Chinese risk.