It's Time to Draw up Policies to
Brace for Changes in Economic
Strategies for China

China's economic growth is predicted to reach 10.2
percent this year, overtaking the U.S. as the world's largest economy by 2041.

By Prof. Park Jong-sun, The Graduate School
of Business Administration Jeonju University
(Former Korean Consul-General in Qingdao, China)

China achieved 9.9 percent growth with policies aimed at balanced distribution, based on the scientific development ideal following the inauguration of President Hu Jintao. Its economy is expected to reach 10.2 percent growth this year, and 8.5 percent in 2007. If China's economy continues to grow at an annual average of 7.8 percent down the road, it will surpass Japan in 2016 on the economic scale and is likely to pass the U.S. in 2041 to become the largest economy in the world.
China is the largest importer of Korean goods and investment creating the potential for trade conflict.
Last year, Korea's exports to China totaled $61.99 billion, accounting for 21.8 percent of the country's total exports. China also raked in 39.3 percent of Korea's overseas investments totaling $6.39 billion, making China the largest importer of goods from Korea, as well as the largest recipient of Korea's foreign investment. For these reasons, there is a high probability that China will exercise a strong trade policy, thus creating trade disputes, if its exports grow sluggish, to reduce trade surpluses.
Korea's exports to China are likely to face challenges from factors such as the Chinese government's restrictive policies; increased interest rates; the regulation on short-term foreign debts; limits on borrowings for foreign businesses in China, which will make funding situations difficult for foreign businesses; and heavy taxes on exports of raw material. The revaluation of the Yuan as demanded by the U.S. and the EU would also weaken the competitive edge of Korean goods. To cope with changes in the world trade market related to China, I would like to suggest a number of strategies:
― Maximize production through investment in technology; Expand taking on high value-added industries and ease trade conflicts by attracting Chinese investment:
First, Korean firms with operations in China should expand their investment in technology development to maximize production, which would raise their competitive edge, so as not to be overwhelmed by China's labor force and the scale of the economy. Furthermore, Korean firms should thoroughly understand the pending labor contract law and China's legal systems and practices to prevent conflicts and problems before hand.
Of those who set up shops in China, only 43.3 percent of Korea's small and medium firms are in stable operational condition. Furthermore, only 20 percent of those are said to be in normal stages of operation. More than one hundred small and medium firms in China have become inoperative or gone out of business, with only $21.5 million of their capital investment retrieved― 38.4 percent of total capital. The number of Korean firms closing operations in China and leaving the country is rising.
Those Korean firms should avoid labor-intensive industries and instead shift to the energy and environment sectors favored by the Chinese government. They should also become familiar with China's liberalization schedule and the plan for the development of the Bohai-rim and enter among others, finance, logistics, and high-tech industries, and seek ways to enter other high value-added industries aimed at the domestic market.
Second, Korean firms in China must be prepared to compete in prices with Chinese commodities. Korean exports to China would naturally taper of as China's automobile, shipbuilding and steel industries are fostered for growth by the Chinese government, due to the weakened competitive edge coming from regulations on anti-dumping and excess facilities. Anticipation is key, as it would have a great impact on the economy through speedy information collection and strengthened monitoring. China began instituting anti-dumping regulations in 1997, and 26 cases were against Korean goods, the largest among countries that have trade relations with China.
Third, China's overseas investments need to be channeled to Korea. China's foreign exchange reserves, (including Hong Kong) is the world's largest at $818.9 billion. China has been making overseas investments with those foreign exchange reserves (as resources) to secure resources, introduce new technologies, and ease the pressure for reevaluation of its currency. Its overseas investment has already totaled $50 billion over 10,000 cases, and is estimated to reach $60 billion by the end of this year. After four years, China will be the 5th largest investor country in the world. Therefore, Korea should reduce China's trade deficit through imports of raw materials and investment from China to avoid trade conflicts. Yet, Korea has only been able to attract $1.7 billion in investment from China, a mere 1.9 percent of that country's total overseas investment, totaling $91.2 billion.
― Diversify export regions and invest more in competitive industries:
China has been strengthening its foreign trade diplomacy, demanding neighboring countries revise the "Non-confirmation of China's Status as a Non-Market Economy,"with its rapid economic growth as a base. It has also been increasing its effort to expand its overseas markets, establishing commodities trade centers, merging with high-tech companies and securing raw material. When China becomes the largest economy in the world, one cannot rule out the possibility that China will collaborate with major countries, including the United States.
Korea can no longer afford to watch China's economic growth from the sidelines. If China continues to be thought of as an economically backward country with a vast difference dividing the two in terms of economy, then China will not only supersede Korea as an economic leader in Asia, but it will also oust Korea out of competition in the global market.
Therefore, we need to depart from the current Chinese investment track, and change to selective competitive industries and regions and market diversification policies in order to ensure exports― a core growth engine for our economy― continue to flourish. We have arrived at the point where government and business must cooperate to draw up new sets of economic strategies for China. nw

The cover of a book entitled, "chinese Investment and Tax Strategies,"authored by Professor Park Jong-sun.