[Trapped in the Chinese Economy]③ "China Closes Wallets Due to Pandemic Scars"

Interview with Park Seung-chan, Professor of Chinese Studies at Yongin University
China's Economic Recovery Card Is Only 'Domestic Demand'
Consumption Suppressed Due to 'Black Swan' Anxiety
Chinese Government Matching Domestic Large Corporations and SMEs
Export Deficit Structure to China Expected to Worsen
Should Seize Opportunity and Pursue Both Competition and Cooperation

"China was in the process of shifting its industrial structure from labor-intensive to technology-intensive when the COVID-19 pandemic and US-China relations issues disrupted this transition. They are trying to recover the economy through domestic consumption, but it doesn't seem easy. In fact, now might be the right time to enter the Chinese market."

Professor Park Seung-chan of the Department of Chinese Studies at Yongin University said in an interview with Asia Economy on the 26th of last month, "What can revive China now is domestic consumption rather than exports, but if the 'scar effect' prolongs, the economic recovery delay could last even longer." The scar effect Professor Park refers to is the habit of suppressed consumption that Chinese people developed over the past three years due to COVID-19. Last year, Chinese household annual savings increased by 17.8 trillion yuan (about 3,415 trillion won), marking the largest increase ever recorded. He explained, "The government is making efforts to boost domestic consumption by issuing consumption coupons, but Chinese citizens hesitate to open their wallets due to anxiety that another black swan event like COVID-19 might occur at any time."

Professor Park emphasized that we should turn China's crisis into an opportunity. In this situation, the strategy is not to withdraw but rather to advance. "Amid the US-China conflict, China currently needs the help of Korean industries and companies," he said. He added, "China is already closely cooperating with Japan in the hydrogen car sector," and predicted, "While we hesitate due to political and diplomatic issues, cooperation between the two countries will accelerate."

He predicted that China will actively implement policies to support domestic companies to reduce unemployment. Although there have been precedents like the so-called 'big tech crackdown,' it was only at the level of 'a sharp stone getting hit.' He also forecasted that efforts to nurture small and medium-sized private enterprises will expand. He said, "The reason youth unemployment is rising sharply in China is that small and medium-sized enterprises are struggling. If the Chinese Communist Party leadership cannot control the unemployment rate, which is a barometer for them, the legitimacy of President Xi Jinping's third term will disappear."

Seungchan Park, Professor of Chinese Studies at Yongin University and Director of the China Business Research Institute.

Below is a Q&A with Professor Park.

- What is the situation of Korean companies operating in China?

▲ Large companies like Hyundai Motor and Samsung Electronics withdrew, and domestic companies that entered alongside them also left. When Hyundai Motor first entered China, they provided training for vendor companies that would accompany them, and I heard that about 200 medium-sized and small companies went together at that time. Hundreds of companies that only looked to domestic large companies ended up isolated like ducks in the Nakdong River.

- Did all of them fail in China?

▲ There are also opposite cases. For example, there is a Korean company called 'POS-Ostem,' an automotive parts company that started in Korea and entered China. It is a joint venture between POSCO and Ostem. It established itself in Wuhan, Hubei Province, in 2016 and currently has four factories in China. Like other automotive parts companies, it followed large companies but expanded its presence after entering. It started supplying to Chinese local automakers and, assuming that China risk could worsen, it also traded with buyers overseas and grew. Although some Korean companies are withdrawing from China, many are still entering China. They just receive less coverage. Among the companies withdrawing, many are labor-intensive and have already lost competitiveness in China.

- How do you see Korea's exports to China going forward?

▲ Due to China's policy to support domestic companies, exports to China are likely to worsen. China must support small and medium-sized enterprises. Taxes paid by SMEs account for more than 60% of China's tax revenue. Accordingly, China started 'flexible development' three years ago. It is a concept like open innovation, where the Chinese government connects large companies and SMEs. For example, when China supported its largest domestic display company BOE in establishing a factory, it encouraged the use of intermediate materials made by small and medium private enterprises. Materials, parts, and equipment account for 80% of Korea's exports to China. However, since China is supporting small and medium private enterprises and encouraging the use of Chinese products instead of importing Korean products, exports to China will inevitably be hit. Moreover, China will invest more in technological self-reliance due to the US. Accordingly, the long-term trade deficit structure with China is expected to deepen.

- Then, what strategy should we adopt?

▲ We must compete and cooperate simultaneously in advanced industries. The basic premise is that US-China relations are an independent variable, and Korea-China relations are a dependent variable. If US-China relations deteriorate, Korea-China relations may also falter. The technological hegemony competition between the US and China is expected to continue for decades, so we must equip ourselves with our own competitiveness. Among advanced industries, in sectors that are not core technologies, for example, in the semiconductor industry, we should explore ways to cooperate with Chinese companies in the back-end process. Companies like DB HiTek, which are not directly sanctioned by the US, are actively doing business with China and making profits.

- What if our technology is stolen?

▲ Even if we do not cooperate, China will catch up with our technology. It is only a matter of time. Therefore, from a corporate perspective, when China needs us the most, we should merge our technology with Chinese capital and market to make money.

- Do you think there is no China risk?

▲ Looking at the results of the Central Political Bureau meeting held on the 24th of last month, the Chinese government seemed to convey a nuance of creating a more favorable environment for foreign companies. China currently needs a lot of external help. If we get bogged down in the possibility of China risk, we might miss the opportunity.

If domestic demand stagnation or real estate risk issues last longer than expected, it might be difficult for the Chinese economy to grow more than 5% this year. Domestic consumption accounts for 68% of China's economy. If per capita income does not rise for a long time and remains at the current level, China will truly fall into the middle-income trap. However, the Chinese government will grit its teeth and upgrade its industrial structure. It no longer sees job creation through factories as a long-term model.

Seungchan Park, Professor of Chinese Studies at Yongin University and Director of the China Business Research Institute.