'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.