By Kwanwoo Jun at the Wall Street Journal
ANKARA, Turkey—South Korea’s government has cut its forecast for the nation’s economic growth next year because of the risks from China’s slowdown, Seoul’s finance minister said.
Close economic interlinkage between China and South Korea also means a sharp deterioration of the Chinese economy would have an “extremely huge impact” on South Korea, although a so-called hard landing for China is unlikely, South Korean Finance Minister Choi Kyung-hwan said in an interview.
Concerns about the Chinese economy are particularly acute in South Korea, an export-dependent nation that sends around a quarter of its overseas shipments to China. South Korean exports fell 14.7% from a year earlier in August—the sharpest drop in six years—as exports to China slid 8.8%.
Wild swings in global financial markets following a currency devaluation in China on Aug. 11 reflect fears that the world’s second-largest economy is entering a major downshift.
“China is unlikely to crash-land. It has the capability to manage a soft landing,” Mr. Choi said in an interview with The Wall Street Journal on the sidelines of a conference for finance chiefs from the Group of 20 developed and major developing economies. “But a hard landing could have an extremely huge impact on South Korea.”
Due to the increasing risks of a Chinese slowdown, South Korea cut its own growth forecast for 2016 to 3.3% from 3.5% when drawing up a new budget plan for next year, the minister said. The budget details will be announced on Monday.
For this year, there is no change to the forecast of 3.1% growth. Mr. Choi said the government was trying to achieve the target, citing stimulus efforts including the central bank’s policy rate cuts four times since last year and recently announced supplementary budget spending. South Korea’s economy expanded 3.3% last year.
In the interview, the minister also called for the U.S. Federal Reserve to make more efforts to reduce uncertainty over pace of its expected interest rate increases through sufficient communications with markets.
“If uncertainty continues to go on like this, it will be a big burden for the world economy,” Mr. Choi said.
Central banks in Europe, Japan, China, Korea and a host of other economies have followed the U.S. Fed’s aggressive easing of policy since 2006 in a bid to spur demand, investment and exports.
The mass easing cycle risks stoking international tensions over exchange rates as the Fed now prepares to tighten policy.
The South Korean finance minister defended the global easing cycle as an unavoidable policy to fight the world’s economic slowdown, while denying “a currency war” is being waged world-wide for an advantage in exports.
He said he expects Japan, China, Korea and other economies to eventually end their easing like the U.S.
“We should have employed this monetary easing policy earlier,” he said.
The minister dismissed the possibility of a surge of funds exiting South Korea ahead of the Fed’s expected policy tightening.
He said there is “almost no chance” for South Korea to experience the capital flight seen during the late 1990s Asian financial crisis and 2008 global financial crisis. Since then, Seoul has taken a range of measures to avoid a repeat, including building up its foreign currency reserves and reducing banks’ dependency on short-term foreign loans.