As China swifts from durable goods to services, S. Korean manufacturing at risk

Posted on : 2016-09-25 12:35 KST Modified on : 2019-10-19 20:29 KST
South Korean sector has depended on unusual demand from China, and computer and electronics most vulnerable

As the focus of China’s domestic market shifts from durable goods to services, South Korea’s manufacturing sector may suffer some serious damage, a new report argues. Business sectors like computers and electronic devices that are tied to the global value chain could be the most adversely affected, according to the report, titled “How Structural Changes in the Chinese Economy Will Affect the Growth of South Korean Industry,” released on Sep. 22.

In the report, Jeong Seong-hun, an analyst with the Korea Development Institute (KDI), argues that growth in China’s domestic market has been based on durable goods. From the perspective of the global value chain (which refers to the international division of labor, and particularly operations in the manufacturing sector), Jeong concluded that South Korea is closely linked to China. Industries in the South Korean manufacturing sector that produce durable goods (including computers, electronic devices and petrochemicals) have enjoyed unusual demand from China, he said.

“When Chinese demand for durable goods increased by 1% in 2014, it had a 0.046 percentage point effect on South Korea’s GDP. This was 15 times greater than 1995,” Jeong said in the report. Such figures suggest the extent to which South Korea’s dependence on China’s domestic market has grown over the past two decades.

It is estimated that increasing Chinese domestic demand accounted for 18.5% of South Korea’s real GDP growth rate in 2014.

But recently, the center of gravity in the Chinese domestic market has been gradually shifting to the service industry. This is bound to have unpleasant consequences for the South Korean manufacturing sector, which has depended upon China’s special demand.

“Presuming that the real growth rate in China’s domestic market, which was 7% in 2014, falls by 1%, South Korea’s GDP will fall by 0.22 percentage points,” Jeong said. The analyst found that the most severely affected industries are computers and electronic devices, in which aggregate production decreased by 1.02 percentage points. Production was between 0.29 and 0.44 percentage points lower in the machinery, electronic devices and automobile industries and down 0.39 percentage points in the petrochemical industry as well.

“If China’s domestic market sees a simultaneous drop in the growth rate and a shift toward the service sector, this will cause South Korea’s main industries to become less competitive. Since this could exacerbate the oversupply that has recently been affecting South Korean heavy industry, preparations should be taken so that we can fundamentally respond to this issue,” Jeong said.

By Noh Hyun-woong, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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