SEOUL/SEJONG, Aug. 24 (Yonhap) — The South Korean economy is feared to take a fresh hit from China’s stock market rout caused by concerns over its economic slowdown and heightened inter-Korean tension, as Asia’s fourth-largest economy is already struggling with slackening demand both at home and abroad, observers said Monday.
Market watchers and policymakers said the trouble surrounding China is casting a shadow on the global economy as a whole, which just started to show signs of recovery on propped up gains in Europe and the United States. This will in turn make a dent in the export-oriented South Korean economy.
Stung by escalating worries about the health of the world’s No. 2 economy, China’s main Shanghai stock index plunged 8.49 percent on Monday alone, with the country’s purchasing managers’ index (PMI) falling to a over six year low of 47.1.
The stock market crash sent shockwaves across Asian equity markets, with South Korea’s benchmark stock price index, KOSPI, nose-diving 2.47 percent from the previous session to close at 1,829.81.
“Problems in China are having a direct impact on South Korea since the country is heavily dependent on its neighbor for trade,” a government insider said. China is South Korea’s largest export market.
South Korea’s trade contracted 4.9 percent on-year in the first seven months of 2015, while its economy grew less than 1 percent for the past five quarters, further worsening confidence in the market.
South Korean financial analysts watch as the benchmark KOSPI and exchange rates are rocked by bad news coming out of China on Aug. 24, 2015. (Yonhap)
“The China shock effectively poured cold water on government efforts to overcome the fallout of the Middle East Respiratory Syndrome (MERS) outbreak by injecting the extra budget into the economy,” he said.
The National Assembly approved an 11.53 trillion won (US$9.6 billion) supplementary budget last month, so the government can cope with MERS, revitalize private spending and breathe new life into the weak economy.
The MERS outbreak has claimed 36 lives here since its outbreak on May 20, causing South Korea’s consumer spending to drop sharply as people avoided department stores, restaurants and other crowded places.
Other analysts said that the current situations are similar to circumstances that led to the Asian financial crisis in the late 1990s.
“South Korea is currently being confronted by a host of tough challenges all at once,” said Jee Man-soo, a research fellow at the Korea Institute of Finance.
He predicted for the time being, problems facing China will not easily die down and could escalate downside risks for South Korea and other countries.
On the issue of North Korea, the finance ministry said that all senior officials are on 24-hour standby to cope with any eventualities.
“Pertinent information on the latest developments are being provided to credit agencies, investors and the press so as to alleviate unnecessary jitters,” it said.
Marathon negotiations were underway at the neutral border village of Panmunjom on Monday after the two sides agreed to diffuse tensions triggered by the exchange of artillery fire on Thursday.
Inter-Korean tensions have escalated sharply following the artillery exchange and subsequent threats by North Korea to take military action against South Korea’s propaganda loudspeakers along the 240-kilometer-long Demilitarized Zone. South Korea also warned it will respond swiftly and decisively to any further provocation. Both sides have placed their militaries on high alert.
“Even if the ongoing talks lead to some sort of understanding to ease tensions, the country still has to cope with other global developments,” a senior official said. “The finance ministry will take proactive steps to deal with economic challenges.”
Government officials said with foreign investors worried about China and Seoul’s standoff with Pyongyang, Seoul will come up with credible contingency plans to cope with all possible developments.
With concerns over China’s economy and the inter-Korean standoff growing, Seoul’s senior policymakers tried to play down their impact on the economy and the behavior of foreign investors.
Financial Services Commission Chairman Lim Jong-yong told lawmakers Monday that while there are concerns, the risk of wholesale capital outflow is not great.
“The likelihood of the Fed raising rates and worries that China’s economy may experience a hard landing is causing greater volatility, but not to the point of capital flight,” he claimed.