[Click eStock] "Korea Needs to Prepare for a Second China Shock"

Hi Investment & Securities issued a warning on the 7th that the Korean industrial sector, experiencing a 'China Shock' due to the slowdown in China's growth rate and changes in the Korea-China trade structure, must prepare for a 'Second China Shock.'

Researcher Park Sang-hyun pointed out, "While the entire world is experiencing the China Shock caused by the slowdown in China's growth rate and uncertainties surrounding Xiconomics, from the perspective of our economy, the need to prepare for another Second China Shock?characterized not by the impact of China's economic growth slowdown but by 'strengthened competition'?is growing stronger." Xiconomics refers to the economic policy line of the Chinese government since President Xi Jinping took office.

In February, Korea's exports to China recorded a decline of -2.4% compared to the same month last year, influenced by a decrease in working days and the Chinese Lunar New Year holiday. In contrast, exports to the United States increased by 9% year-on-year despite fewer working days. For the second consecutive month, February's export value to the U.S. surpassed that to China.

Researcher Park emphasized, "China's unshakable position as the top export destination is now being challenged," adding, "More importantly, while exports to the U.S. continue to steadily increase despite various domestic and international adversities, exports to China have not found a turning point from their declining trend. The stagnation of poor export performance to China is becoming more entrenched."

He identified the causes as the slowdown in China's growth rate and changes in the Korea-China trade structure. China's import share from Korea has been on a declining trend. The import share was around 10% in 2016 but has sharply dropped to the mid-6% range. Compared to other countries, China's demand for Korean products has significantly decreased.

Researcher Park analyzed, "The weakening demand for Korean products within China likely reflects a disruption in the division of labor structure between Korea and China in terms of trade," explaining, "The structure where Korea exported intermediate and capital goods to China, and China produced final finished products for export, has weakened."

He continued, "An indicator reflecting this is the trade balance of intermediate and capital goods with China," noting, "The surplus in the intermediate goods trade balance, which had driven the trade balance with China, has sharply decreased to the point where concerns about a shift to deficit are rising." In fact, the trade balance for capital goods has already turned negative. Korea, which used to export intermediate and capital goods to China, is now in a position of importing Chinese intermediate and capital goods.

He stated, "Chinese products are no longer of improved quality due to mere continental luck but have reached a level competing with Korean products due to enhanced industrial competitiveness," diagnosing, "Although concerns about the Chinese economy are significant, the pace of industrial development is faster than expected. The fact that China has become the world's number one exporter of automobiles is a signal of China's industrial development and competitiveness strengthening." This implies that as the Korea-China trade structure shifts from a complementary relationship to a competitive one, the additional shock to Korean industries could increase.

Alongside this, he pointed out the growth of Chinese e-commerce platforms known as the 'Four Little Dragons'?AliExpress, Temu, Shein, and TikTok?as a cause for concern. These four companies are rapidly penetrating the Korean market, which could lead to another China Shock.

There is also an observation that the high-quality development strategy, a pillar of Xiconomics, could negatively impact Korean-related industries and exports. Currently, China is aiming to overcome U.S.-China conflicts and maintain growth momentum through high-quality development, focusing on three new growth engines: electric vehicles, batteries, and solar power.

Researcher Park expressed concern, "The problem is that these industries overlap with Korea's new growth industries," adding, "While Korean products can compete based on their competitiveness, if China triggers overinvestment risks in these industries again through massive investments, it will be difficult for Korea to avoid the impact. The high-quality development strategy, a key policy of Xiconomics, has a high potential to negatively affect Korean industries and exports."