Bank of Korea: "China's Easing Monetary Policy Boosts Exports and Lowers Interest Rates"

Bank of Korea publishes report on June 10: 'Impact of China's Monetary Policy Changes on Our Economy'
China's Interest Rate Cut → Capital Inflow into Korean Bond Market

[Asia Economy Reporter Jang Sehee] An analysis has emerged that China's accommodative monetary policy increases South Korea's exports to China and lowers interest rates. When the Chinese yuan depreciates due to monetary policy easing, the price competitiveness of Chinese products improves, leading to increased exports to advanced countries, which in turn boosts South Korea's exports of intermediate goods to China.

In the report titled 'The Impact of Changes in China's Monetary Policy on Our Economy,' released by the Bank of Korea on the 10th, it stated, "South Korea has a large trade volume with China and the financial sector linkages are gradually strengthening, so changes in China's monetary policy affect our economy through various channels."

The Bank of Korea explained that when the yuan's value falls due to accommodative monetary policy, China's exports to advanced countries increase, and South Korea's exports of intermediate goods to China also rise. Intermediate goods account for 73.2% of South Korea's exports to China, which is a significant proportion.

On the other hand, the expenditure-switching channel, where the won appreciates against the yuan leading to a decrease in South Korea's exports to China, was found to be less significant. This is because the increase in intermediate goods exports through vertical trade integration offsets the decrease in final goods exports caused by expenditure switching.

Furthermore, the report predicted that China's monetary easing would cause a decline in South Korea's interest rates and increases in stock prices and inflation through financial channels such as portfolio adjustments, asset price changes, and raw material price fluctuations.

The report noted, "In addition to the yuan depreciation, if the decline in returns on Chinese assets causes investment funds to flow out of China and into South Korea's bond market, it could lead to a decrease in domestic bond yields."

Meanwhile, from a price perspective, China's expansionary monetary policy, given its large share in global crude oil and raw material demand, drives up crude oil and raw material prices, ultimately exerting upward pressure on South Korea's inflation.