Let's Hitch a Ride on China's Economy

Of late, optimism toward the world economy seems to be waning, as the political instability of MENA, the excessive national debts of some countries in Europe, the financial problems of countries holding Japanese debt since the earthquake and tsunami swept the northeastern part of Japan, the uncertainty of international oil prices and of the economies of advanced countries following the completion of the quantitative easing II (QE2) in the United States have all contributed to an increasing economic pessimism. But China stood out with its ability to further its economic growth amidst these unfavorable global factors.
China has been recording an average 10.2 percent economic growth annually since its reform and opening. Last year the country ranked second highest in economic growth in the world at 10.3 percent and was at the top in foreign exchange reserves and exports. This year, the country is expected to record 9.6 percent economic growth, attract $110 billion in foreign direct investments and a 21 percent rise in exports, and thus playing the role of a growth engine for the global economy.
This year, the Chinese government kicks off its 12th five-year economic development plan. The notable feature of the plan is that its top priority is placed on invigorating domestic economic growth by promoting domestic consumption.
The move is considered an unprecedented strategy by the Chinese government as it has never before attempted to expand the growth of the economy through the expansion of consumption.
If it is pushed as planned, it would be the first time that economic growth is stimulated through the combination of consumption, investment and export growth, thereby opening a new phase for China's economic growth.
The expanded consumption to lead economic growth would make it easier for the government to switch the major objectives of its economic development plans to favor the people's wealth over the state's wealth.
Increases in earnings, the reform of wealth distribution, the reform of social security and the expansion of the domestic market, if successful, could lead to the expansion of the market with political support, and the continuous promotion of spending could trigger the growth of consumer goods industries.
If such a move is successful, the base for the continuous long-term growth of the Chinese economy would be secured as another growth engine for China's industrial expansion.
The leaders who governed China since the formation of the government have been technocrats. Vice President Xi Jinping, who will succeed President Hu Jintao, and the fifth-generation leaders of the Chinese Communist Party at the 18th Chinese Communist Party Convention in October 2012 are expected to bring many changes to government policies. Xi is expected to maintain the core of China's socialism and market economy and continue to develop Hu's policies for social harmony.
At the same time, the next generation of Chinese leaders are expected to systemize China's political circles to make China a developing country with a sound economy.
On international issues, China will take up strategies to pursue international laws and regimes as a G-2 country with strengthened economic power.
Such diplomatic strategies of China are designed to reduce conflicts with the United States and lead reform of the international order under a soft balance strategy.
Now, let's turn our eyes to the possible impact of China's economic growth and strengthened international position on Korea. China has been a mighty force on the Korean economy as the largest export market country, accounting for 21.1 percent of the nation's total exports and the second largest country for Korean overseas investments, accounting for 19.5 percent. For these reasons, we have to keep up with changes in China's various economic indicators, which occur rapidly.
In June, China's CPI rose rapidly to 6.4 percent, showing that interest and reserve rates would rise, so we must be ready for possible reductions in our exports due to the appreciation of the yuan. We also have to evaluate the impact of the Dec. 5 plan regarding our exports and investments in China and search for appropriate countermeasures.
First, we have to increase our share of China's domestic market. China has been stressing the redistribution of wealth, but the income gap widened as its economy developed further. Accordingly, the Chinese government is likely to greatly expand government expenditures in the medical, education and social welfare sectors to bridge the income gap.
Accordingly, we have to draw up measures to replace the current export strategies to China with new ones based on region and consumer levels in China. We have to focus on well-known products such as home appliances, cosmetics and other expensive brand-name products in order to upgrade the image of Korean products not only to expand our exports but also to preemptively expand our share of China's domestic market before anyone else.
Second, we ought to devise new investment strategies, as the current strategies are focused on labor-intensive industries in China and general wage levels are likely to rise by 15 percent this year due to various measures taken by the Chinese government.
Before anything else, uncompetitive industries that rely on old technologies, equipment and machinery should be addressed. In line with the Chinese government's policies, labor-intensive and backward industrial plants should be relocated to central and western regions or to third countries and replaced with high-tech industries in such areas as electronics, semiconductors, new and recycled energy and environment-friendly industries under revised investment strategies supported by appropriate policy measures.
Third, we ought to attract some of China's overseas investments to Korea, as China has huge foreign exchange reserves totaling around $1 trillion, and preempt possible trade conflict by expanding imports of Chinese raw materials in order to reduce the trade balance in favor of Korea. At the same time, we have to supplement foreign exchange management to cope with an increasingly strong yuan in international trade.
Fourth, we ought to promote a joint technology research center with China and develop new technologies jointly and push hard for the free trade agreement with China, which is being considered by both countries. We cannot overemphasize the matter, as China, the top manufacturing nation, will try to import advanced technologies through M&As and high-degree industrial partnerships with other countries to enhance its competitiveness and pursue measures to improve the quality of growth and effectiveness of its industries.
Fifth, we should set up a professional research body that can speedily provide global economic and financial information and foster its development. It is a task that cannot be delayed given that global economic and financial conditions are changing rapidly in this day and age, owing to rapid digitalization and, therefore, we have to keep pace with it.
Although there are uncertainties in the global economy, it is certain that the Chinese economy will make a soft landing. Now is the right time to take advantage of the Chinese economy's dynamic transformation and find a way for our economy's resurgence.
We should turn our export products into expensive brand-name products to expand our exports to China and create jobs by attracting Chinese investments and the establishment of joint-venture firms in partnership with Chinese firms. nw

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