[China Risk, Korean Wave] ④ "Already Reflected in Domestic Stock Market" vs "Negative Impact on Related Industries"

KOSPI Falls 3.8%, KOSDAQ 4.0% During September 2021 Evergrande Group Crisis
Similar Decline in KOSPI and KOSDAQ After Biguiyuan Incident
Market Volatility Likely to Increase Until Chinese Government Proposes Solution

As the Chinese real estate crisis intensifies, it is acting as a source of instability in the domestic stock market. Although the stock market rebounded this week, the crisis has not been resolved, and it is expected to continue to weigh on the market for the time being. Experts believe that the possibility of systemic risk transmission is limited, but in the short term, the won-yuan currency synchronization will affect the exchange rate, and in the medium term, the slowdown in China's growth rate will act as a negative factor for related industries.

Weakening Yuan Leads to Weak Won, Concerns Over China's Growth Slowdown

According to the Korea Exchange on the 23rd, last week (14th-18th), the KOSPI fell by 3.35% and the KOSDAQ by 3.82%. This was due to the Chinese real estate risk emerging as a negative factor for the stock market. Choi Yoo-jun, a researcher at Shinhan Investment Corp., explained, "The emergence of Chinese real estate risk and the burden of rising U.S. interest rates acted as downward pressure on the stock market last week. On the 7th, Country Garden, a Chinese real estate developer, failed to pay interest on its dollar bonds, raising liquidity concerns, and as the default risk of many real estate companies became prominent, risk appetite quickly diminished."

The market is placing weight on the view that the Chinese real estate risk will not spread into systemic risk. This is because it is expected that the Chinese government will intervene to manage the situation, as it did during the Evergrande Group crisis in 2021. Jo Cheol-gun, a researcher at NH Investment & Securities, explained, "Considering the Chinese government's strong control, the banking sector's reduced real estate exposure, and limited derivative-related linkages, the possibility of spreading into systemic risk seems low." Choi Seol-hwa, a researcher at Meritz Securities, added, "Most of the debt is held by Chinese financial institutions, making risk management relatively easier. Most of the debt of Chinese real estate developers or Local Government Financing Vehicles (LGFVs) consists of bank loans, and in the bond market, about half of the buyers are commercial banks, most of which are state-owned enterprises, so there is a high possibility of extending debt repayment." She continued, "Even without bailouts, the overall adjustment process can be controlled at a moderate pace, which differs from the typical financial crisis progression in emerging markets."

There is also an opinion that if the risk does not spread into systemic risk, the related issues have already been reflected in stock prices. Lee Jae-sun, a researcher at Hyundai Motor Securities, said, "It is expected that the government will intervene to adjust debt and strengthen control before the risk spreads into systemic risk this time as well. If the possibility of worsening is limited, the issue is already reflected in stock prices. During the Evergrande crisis in September 2021, the KOSPI and KOSDAQ fell by 3.8% and 4.0%, respectively, and after the Country Garden incident, the KOSPI and KOSDAQ showed similar declines," he analyzed. Han Ji-young, a researcher at Kiwoom Securities, also forecasted, "Although the economic downturn pressure caused by the Chinese real estate risk is a psychological burden on the domestic stock market, considering the low probability of spreading into systemic risk, the adjustment pressure across the domestic stock market will be limited."

However, until the risk is completely resolved, it is expected to act as noise causing volatility in the stock market. The KOSPI rebounded this week after falling for six consecutive trading days, but the rise has been limited. Researcher Choi Yoo-jun said, "Volatile market conditions are inevitable until a solution is found. The KOSPI and Chinese stock markets are showing linked movements, and China's weak indicators are putting downward pressure on the won, affecting foreign investor flows." Researcher Choi Seol-hwa added, "In the short term, due to China's monetary easing and sluggish economy, the yuan is weak, which may exert downward pressure on the won as well. In the medium term, prolonged low growth in China is likely to be a burden on the economies of countries highly dependent on trade, negatively impacting related industries."

Growing Concerns Over Deflation in Chinese Economy

The real estate risk is expected to negatively affect the Chinese economy, which is already facing growing concerns over slowdown. China's Consumer Price Index (CPI) in July fell by 0.3% year-on-year, turning negative for the first time in two years and five months, raising deflation concerns. Exports decreased by 14.5% compared to the same period last year, marking the largest decline in three years and five months. July retail sales and industrial production increased by only 2.5% and 2.7%, respectively, compared to the same period last year, falling short of market expectations.

Researcher Jo Cheol-gun said, "Due to the real estate market slump, China's GDP growth rate this year could be lowered by up to 1 percentage point. Depending on the government's stimulus strength, but due to domestic and external uncertainties, this year's GDP growth rate may fall short of the government's target of 5.0%." Researcher Park Soo-hyun of KB Securities said, "It is necessary to lower expectations for China's economic growth rate. Especially since real estate prices, which account for an absolute proportion of household assets, are unlikely to show a trend rebound, the improvement in the consumer market will also proceed slowly." He added, "Although the Chinese government recently allowed group tours to South Korea, it will be difficult for Chinese tourists' spending power to reach levels higher than before COVID-19."