BoK: China deleveraging impact may be bigger
SEOUL: The economy of South Korea, which is very reliant on China, may see more adverse impact than previously expected from China’s plan for deleveraging, said the Bank of Korea (BoK) in a report.
South Korea’s gross domestic product growth could be 0.3 percentage point less than expected this year and might be 1.2 percentage point less in 2020 because of China’s plan to cut financial risks by deleveraging, said the central bank, citing data from Oxford Economics and Fitch. South Korea recently trimmed its forecast for growth to 2.9 per cent this year from an earlier projection of three per cent, amid rising global trade tensions.
With the increasing possibility that financial risks such as shadow banking and corporate debts might have an impact on China’s real economy, preventing such risks would be the top priority for Chinese policymakers for a while, according to the BoK report.
President Xi Jinping began in 2016 to curb risks in the nation’s financial markets and China had seen a record amount of bond defaults this year, according to the report.
With rising defaults at Chinese firms, risks have expanded for companies in South Korea and other countries that have invested in the debt of Chinese firms, said the BoK, citing the case of Korean brokerages investing in the debts of China Energy Reserve & Chemicals Group Co.
Still, the level of Chinese corporate debt defaults seemed to be lower than in other countries, and it appeared to be “a natural procedure” of restructuring zombie firms, according to the BoK report.