Korea’s decoupling from China

Over the past two weeks, global financial markets have seen renewed relief on hopes of a resolution to the war in Ukraine and stability in the face of inflationary pressures. More importantly for Asian markets, the Chinese government has calmed investors with supportive language regarding political repression against big business.

Long before Russia invaded Ukraine, China walked away from decades of globalization under pressure from the United States. Even before the standoff between the United States and China, South Korea saw a glimpse of China’s abrupt departure from the international community triggered by its decision to place a high-altitude terminal. area defense system (THAAD) in 2016.

During his election campaign, President-elect Yoon Suk-yeol declared his support for the controversial THAAD system, already prompting frosty responses from China. South Korea’s decoupling from China is expected to accelerate politically and economically under the new conservative president.

North Korea began testing its nuclear weapons in 2006, but it wasn’t until it successfully tested a long-range intercontinental ballistic missile (ICBM) that the United States realized the real dangers of nuclear capabilities of North Korea in the Americas.

Just before the last conservative president was sacked in 2017, the United States hastily placed its THAAD system as a deterrent against North Korea. However, China has accused the United States of directing its THAAD against the mainland rather than North Korea. Even more worrisome than North Korea’s saber slashes have been China’s sanctions against South Korea and its companies.

Since the THAAD issue first erupted, China has placed South Korea on a “silent sanctions” list via measures such as a ban on group visits. Lotte Group, which provided the land where the THAAD Battery is deployed, was eventually forced to withdraw all of its operations from China due to unsustainable business conditions.

As a result, Korean companies operating on the mainland have been looking for opportunities outside of China in recent years. South Korea’s experience with THAAD and China could serve as a ‘canary in the coal mine’ for many other countries as China continued to step up sanctions and reverse market reforms .

Under the banner of “common prosperity”, China scrutinizes not only the companies operating on its territory but also its national champions. It seems that President Xi Jinping only has time for ardent servants of the Communist Party while being ready and willing to purge dissenters.

To be fair, a similar response is being seen from the United States and its allies. After several decades of booming globalization, the era of rules-based international law and trade is reversing before our eyes.

Historically, Korean exporters were known for their aggressive boom and bust approach, which helped them establish dominance in many cyclical industries such as construction, chemicals, and semiconductors.

The emergence of China, armed with massive government support, has taken away Korea’s advantage in many industrial products. In addition, rising GDP and wages in Korea have turned the country into an expensive labor market for the manufacturing sector. In less than a decade, China has gone from Korea Inc.’s biggest customer to an emerging competitor.

Such a turnaround is unprecedented in history, given that it took over 40 years for Korea to overtake Japan in a similar mission. With an intensifying global competitive landscape, Korea Inc. will need to find industries worthy of a developed economy.

Since the THAAD decision, China-focused listed Korean stocks have suffered while the Korean stock market has hit all-time highs. Initially, the political reaction of the Chinese government was stated as the reason, but more damaging was the rapid improvement of China Inc.’s products and the ensuing “import substitution”.

Even Samsung has seen its mobile handset business in China decline, with its market share now below 2%, down from 20% just a few years ago. Similarly, Hyundai’s automobiles have slipped into the low-end segment, where some local brands are considered higher in terms of brand positioning.

Reminiscent of the pricing strategy of Korean exporters, Chinese products seek to gain market share through the powerful combination of improved quality and aggressive pricing. More recently, even Korean cosmetics brands have seen locals attack their market position.

The economic transition from the old to the new has been difficult for Korea’s egalitarian society, which still maintains a strong ideology of income equality coupled with uninterrupted growth. Fortunately, Korean companies have sought alternatives to China as a consumer market and manufacturing base.

Replacing China, markets like India and Indonesia are now the focal point for overseas expansion. The transition will be slow, but they are ahead of many other multinationals that still look to China for future growth. China’s political positioning on the Russian-Ukrainian conflict will be decisive in deciding its place in world trade. China’s policy decisions in the coming months could determine the pace and extent of the decoupling of the South Korean economy from China, which is already underway.
Peter S. Kim (peter.kim@kbfg.com) is Managing Director of KB Financial Group.

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