'China shock' stokes fears of slower growth in S. Korea
'China shock' stokes fears of slower growth in S. Korea
Agence France-Presse, Seoul
China's efforts to rein in its overheating economy are stoking fears of slower growth in South Korea, prompting a freeze on its prime central bank interest rate.
The Bank of Korea announced last week its decision to keep its overnight interbank lending rates for May unchanged at 3.75 percent for the 10th consecutive month in an effort to boost growth in a struggling economy.
The bank ruled out any short-term change in macro-economic policies amid concerns China's belt-tightening monetary policy could slow South Korea's exports and overall economic growth.
Analysts said South Korea could take a severe beating from Beijing's policy measures to cool the economy because of South Korea's heavy dependence on China.
"I think it's the China shock that underlies today's steep falls," Daishin Securities strategist Jo Yong-Chan said.
"Like Taiwan, South Korea's exporters are heavily dependent on Chinese demand and stocks heavily exposed to China were the hit hardest."
South Korea has been a major beneficiary of the booming Chinese economy, with its exports to China, which surged a whopping 51 percent in the first three months to March this year, offsetting its sluggish domestic demand.
"The possibility of a rate hike is now almost out of sight," Daehan Investment Securities economist So Jae-Yong said.
"The China effect will likely come to felt in the fourth quarter, leading to slower export growth," he added.
The central bank predicts South Korea's economy, led by strong exports, will grow by up to 6 percent this year.
The Daehan economist, however, forecast lower growth suggesting South Korea should use its fiscal policy to stimulate sluggish domestic demand.
South Korean financial markets have remained volatile since Chinese Premier Wen Jiabao hinted on April 28 at taking strong measures to cool down the mainland economy, sparking a sell-off across the region.
South Korean officials moved quickly to quash concerns saying China's domestic demand would remain robust.
Finance and Economy Minister Lee Hun-Jai said South Korea should not overreact to China's "pre-emptive" measures to cool down its economy.
"Such measures are designed to prevent a crash-landing," he said, adding the Chinese economy was expected to grow eight percent this year.
"Yet we must not be complacent because of our high dependence on the Chinese market," he said.
Economic officials believe preventing sharp growth in China could help South Korea's economy in the long run.
South Korean steel firms welcomed China's move, which will help ease their worsening supply shortage.
China's high growth had caused a surge in steel prices, prompting South Korea to impose a temporary ban on exports of scrap iron and steel bars in March.
"In the short term, it is bad news for the Korean economy. In the mid- and long haul, however, it will be of help to corporate Korea," South Korea's central bank chief Park Seung said.
"Therefore, there are no reasons to change our macro-economic policies."
South Korea's current account surplus rose to a six-year high of US$6.2 billion in the first quarter of this year, helped by gains in trade, compared with a deficit of $1.52 billion a year ago.