[Trapped in the Chinese Economy]⑬ "Decoupling from China is an Illusion... We Must Accurately Assess Whether the US-Japan-Korea Alliance Has Real Benefits"

Interview with Jeon Byung-seo, Director of China Economic and Financial Research Institute
"China will not become like Japan's 'Lost 30 Years'"

"Decoupling from China to reduce dependence on material imports is not feasible. Having 80-100% of the global supply chain for certain materials means a monopoly. The same applies to exports. Rather, the more important question is whether we can maintain the current level. The U.S. has shifted its stance from decoupling to 'de-risking,' and Germany and France are also investing in China. We should not foolishly keep talking about decoupling alone."

Jeon Byung-seo, Director of the China Economy and Finance Research Institute, recently explained in an interview with Asia Economy about South Korea's appropriate response amid the U.S.-China hegemonic rivalry. While there is a growing call to reduce South Korea's decades-long high dependence on exports and imports with China as it joins U.S.-led regulations against China, he explained that decoupling is realistically impossible and offers no practical benefit.

Director Jeon pointed out, "While South Korea's trade with China has turned into a deficit, its trade surplus with the U.S. has significantly increased. However, 80% of key materials for electric vehicle batteries?nickel, manganese, cobalt, and graphite?come from China, which accounts for a large part of the U.S. trade surplus. Without China, there is no U.S. surplus either." Regarding U.S. semiconductor export restrictions on China, he said, "U.S. and Japanese companies will find it difficult to endure the revenue decline caused by reduced exports to China," adding, "There are many loopholes."

Below is a Q&A with Director Jeon.

- How do you see the future trajectory of the U.S.-China conflict?

▲ Currently, the core battleground of the U.S.-China conflict is semiconductors and artificial intelligence (AI). However, the end of this conflict is expected to be decided not by technology but by finance. Look at the case of Japan. The U.S. had the same kind of conflict with Japan in 1985. At that time, Japan was number one in the world in automobiles, home appliances, and semiconductors. But the U.S. sharply revalued the Japanese yen through the Plaza Accord. After that, global money flowed into Japan. At its peak in 1995, the money that had entered Japan from the U.S. was all sold off from Japanese real estate, stocks, and bonds. This caused the bubble to burst, leading to Japan's 'Lost 30 Years.'

Japan accepted the currency appreciation knowing this would happen. After Japan's defeat, the U.S. prevented Japan from maintaining a military. Japan relied entirely on the U.S. for defense. From Japan's perspective, it could not refuse the U.S.'s demand for currency appreciation because it depended on the U.S. for defense. This is the power of the U.S. Similarly, even though South Korea cannot economically abandon China, it is politically clapping hands with the U.S. against China.

- Is there a possibility that China will follow Japan's path of the 'Lost 20 Years'?

▲ The U.S. intends to apply the method it used on Japan to China. But China today is very different from Japan in 1985. First, China does not rely on the U.S. for defense. Also, unlike Japan, China's financial markets are not open. For a bubble like Japan's to occur, foreign capital must be able to freely buy Chinese stocks, bonds, and real estate, but that is not the case. The U.S. will try to open China's financial markets through semiconductor export restrictions. If finance opens up, the U.S. can use the same method on China as it did on Japan.

- How effective will the semiconductor export restrictions by the U.S. and its allies be?

▲ History teaches us that technology struggles to overcome the market. The U.S. leads in semiconductor and AI technology, but China leads in the market. The problem for the U.S. is that national interests and corporate interests are separate. The U.S. Semiconductor Industry Association issued a statement saying sanctions on China should stop. Over 30% of the revenue of U.S. semiconductor equipment companies comes from China. From a corporate perspective, they cannot afford a revenue drop next year. The U.S. blockade may delay China's technological progress, but if China achieves localization, that's the end. The U.S. semiconductor regulation strategy is brilliant but has many loopholes.

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- Do you think the current structure with the U.S. as the world's largest economy and China as the second can be reversed?

▲ The current structure is likely to last at least 10 to 15 years. But someday, China will surpass the U.S. in GDP size. It's like a 100-meter race where the leading runner (U.S.) runs at 10 km/h and the trailing runner (China) runs at 40 km/h; it's just a matter of time before China overtakes. However, surpassing the U.S. in GDP does not mean China has won or become the hegemon. National power is cumulative. To become a hegemon, military strength, technological capability, cultural influence, and political power must combine with GDP.

- With the intensifying U.S.-China conflict, the need for 'decoupling from China' is growing.

▲ As of April this year, South Korea's export dependence on China has decreased to 19.1%, lower than Taiwan, Australia, and Japan. There is no more room to reduce dependence on China. Now, the more important issue is whether South Korea can maintain its current level of exports to China rather than decoupling. While South Korea's trade with China has turned into a deficit, its trade surplus with the U.S. has greatly increased. However, South Korea imports 80% of nickel, manganese, cobalt, and graphite?materials used in electric vehicle batteries that account for a significant portion of the U.S. trade surplus?from China. Without China, there is no U.S. surplus.

- The dependence on China for material imports is very high. Is decoupling possible?

▲ Recently, EcoPro has been in the spotlight; it is a company that makes cathode materials. Electric batteries require both anode and cathode. The anode is made of graphite. But whether synthetic or natural, most graphite is supplied by China. If China stops supplying graphite, all our battery companies would have to shut down. Decoupling to reduce dependence on material imports from China is not possible. Having 80-100% of the global supply chain for certain materials means a monopoly. China can sanction South Korea if the semiconductor issue is resolved. Currently, the U.S. regulates semiconductors, but since South Korea can obtain semiconductors, China does not impose sanctions.

- Then how should South Korea respond amid the U.S.-China hegemonic conflict?

▲ The U.S. has already shifted its stance from decoupling to 'de-risking.' Germany and France are also investing in China, and Japan has placed China at the center of its diplomatic policy in the second half of the year. South Korea should not foolishly keep talking about decoupling. If exports to China decrease, we need to identify the cause and study how to regain a surplus. That is the government's role.

The China issue should not be handled emotionally. If companies die, national income decreases accordingly. The U.S. should treat South Korean companies well if they build factories in the U.S., but South Korea was excluded from the Inflation Reduction Act (IRA). To receive semiconductor subsidies, they demand technology disclosure. Is the current 'Anmi Kyungmi' (security with the U.S., economy with the U.S.) beneficial? We need to look at it precisely.

- Recently, China's economy has not shown rapid recovery. What is the cause?

▲ Although a lot of money has been injected into the market, investment sentiment has weakened due to falling asset prices such as stocks and real estate, and a significant portion of funds has gone into bank deposits. Since funds are not circulating, domestic demand is weak. China's GDP is 120 trillion yuan, but net bank deposits increased by 30 trillion yuan, meaning 25% of funds are hidden in banks. Of course, China's economy is weaker than expected but not sluggish. In June, consumption, investment, and export growth slowed, but it is still difficult to judge whether this is a trend or temporary.

- How serious is China's debt problem?

▲ The debt risk in China has been discussed for over 10 years, but China has never defaulted. Although Chinese corporate debt is serious, 60% of it is loans to state-owned enterprises. If a state-owned enterprise defaults, the government takes responsibility. So is China's national debt a problem? No. Among the G7 countries, Japan, France, and Canada have higher national debt ratios than China. If China's debt risk were a problem, these countries would have already collapsed.

Local government debt in China is similar. South Korea and the U.S. have local autonomy, but China has a centralized system. Local governments send 70% of their revenue to the central government, which strategically allocates the received taxes mainly to important areas. Local governments that receive less allocation may run deficits. Then local governments invest through local state-owned enterprises with cash and raise funds by selling land-use rights. Although the real estate market is weak recently, they can sell more land-use rights in such times. Local government debt does not exacerbate China's crisis.