The Bank of Korea Highlights "Reemergence of Risks in China's Economic System Due to COVID-19"

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] As the short-term shock to the Chinese economy due to the novel coronavirus infection (COVID-19) appears inevitable, concerns have been raised that this incident has brought renewed attention to the risk factors within the Chinese economic system, which has maintained high growth rates until now.

On the 23rd, the Bank of Korea stated in its 'Overseas Economic Focus' report that "Due to inadequate initial response, COVID-19 has rapidly spread, making negative impacts on the Chinese economy visible, not only in the service sector but also in supply chain disruptions caused by work stoppages."

Additionally, it explained that the Chinese economy is exposed to several risk factors in the mid to long term, including ▲trade disputes with the United States ▲excessive corporate debt ▲declining working-age population.

First, concerns arise from the possibility that China's exports and advanced technology development may be constrained due to the United States' continuous checks on China's high-tech industries and large state-owned enterprises. Since facing trade disputes with the U.S. from 2018, China's export growth rate sharply declined from 7.9% in 2017 to 0.5% in 2019.

Excessive corporate debt, amounting to 154.5% of China's Gross Domestic Product (GDP) as of the second quarter of 2019, is also a risk factor. This level is considerably higher compared to countries with similar income levels such as Russia (45.4%), Mexico (25.8%), and Brazil (42.3%). China's working-age population has also been decreasing since 2014.

However, the Bank of Korea noted, "The Chinese economy also has factors that can mitigate risks, such as continuous population inflow into cities, improvement of the economic structure towards qualitative growth, and the government's strong market control power," adding, "The possibility of long-term stagnation due to damage to China's growth engine is low, but the government's role in improving the economic structure is expected to become more important."

Furthermore, it emphasized, "To sustain stable growth, it is necessary to consistently implement policies that effectively manage short-term shocks like COVID-19 while resolving mid- to long-term risk factors."