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China, S. Korea eye economic ties
By Chris Leung |
June 17, 2013, Monday
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China and South Korea's trade dependency has increased remarkably since 2000 and South Korea is now China's sixth largest trading partner. Bilateral trade volumes jumped 740 percent over this period to reach US$256.2 billion in 2012, while the China's trade deficit with South Korea has jumped almost seven-fold to US$80.9 billion in 2012. Although Japan is still China's largest trading partner in North Asia, imports from South Korea have surpassed those from Japan beginning September 2012.
South Korean automobile imports stole the limelight last year. Hyundai and its affiliate Kia sold a combined 1.34 million cars in China and became the third biggest seller in the country, behind Volkswagen and General Motors. Japanese companies - Nissan and Toyota - which held second and third places respectively in the first half of 2012, dropped out of the top three.
In other segments, South Korean imports dug deep inroads into the Chinese market years ago. China's imports from South Korea have already exceeded those from Japan under several categories. Samsung, South Korea's largest company by market capitalization, derived more than 20 percent of its revenues from China in the fiscal year 2012, and is rapidly expanding to counter Chinese telecommunication giants.
South Korea's outward direct investment (ODI) has shifted from mining to manufacturing recently. This is a positive sign for China as it attracted the most manufacturing ODI from South Korea. Spurred by manufacturing investment, China became the top destination for South Korean direct investment in the first quarter of 2013. Statistics from China also affirmed the pickup of South Korean direct investment into China recently. China's overall utilized FDI from South Korea started to pick up on a year-on-year basis from the first quarter of 2012 after falling throughout the second half of 2008 to 2011.
South Korean ODI went to developed economies chiefly for the purpose of market access. Investments into developing Asia, especially China, also aimed at benefiting from cheap labor. Although China's labor costs have been rising lately, its consumers are getting wealthier.
Market access
Thus, market access may gradually become a more significant factor of consideration for South Korean companies. This is consistent with the fact that more South Korean FDI went into China's manufacturing sector despite rising labor costs.
On the other hand, China's ODI into South Korea was just US$341.7 million in 2012 - a measly 0.5 percent of total ODI. This is probably due to the fact that much of Chinese outward investment went to mining and natural resources. China is unlikely to find investment in South Korea's services sector attractive due to high labor costs and the small size of its market relative to China's.
South Korea's presence in China is becoming ever more apparent in particular industries. Against this background, it makes sense for China to deepen diplomatic ties with South Korea in the sphere of economic cooperation.
Yet, one cannot expect South Korea to fully replace Japan. Japan is still far ahead in terms of innovation and business sophistication. China's massive high speed railway system adopted Japanese bullet train technology, and China still imports a lot more transport and aviation equipment from Japan than it does from South Korea.
To better capture opportunities from the increasing presence of South Korea and capitalize on Japan's innovative strengths, China is now arranging discussions on the potential China-Japan-South Korea free trade agreement (FTA), and the next round of trilateral FTA talks are scheduled to happen in China this summer, followed by another meeting in Japan by the year end.
China is also engaging in bilateral exchanges with South Korea on trade partnerships. This sets the stage for strategic dialogues and more mutual cooperation in other areas as well. In the investment space, China can further open its industries for South Korean foreign direct investment by offering regulatory incentives. At the same time, China's manufacturing upgrade will invoke renewed interest from investors.
South Korean automobile imports stole the limelight last year. Hyundai and its affiliate Kia sold a combined 1.34 million cars in China and became the third biggest seller in the country, behind Volkswagen and General Motors. Japanese companies - Nissan and Toyota - which held second and third places respectively in the first half of 2012, dropped out of the top three.
In other segments, South Korean imports dug deep inroads into the Chinese market years ago. China's imports from South Korea have already exceeded those from Japan under several categories. Samsung, South Korea's largest company by market capitalization, derived more than 20 percent of its revenues from China in the fiscal year 2012, and is rapidly expanding to counter Chinese telecommunication giants.
South Korea's outward direct investment (ODI) has shifted from mining to manufacturing recently. This is a positive sign for China as it attracted the most manufacturing ODI from South Korea. Spurred by manufacturing investment, China became the top destination for South Korean direct investment in the first quarter of 2013. Statistics from China also affirmed the pickup of South Korean direct investment into China recently. China's overall utilized FDI from South Korea started to pick up on a year-on-year basis from the first quarter of 2012 after falling throughout the second half of 2008 to 2011.
South Korean ODI went to developed economies chiefly for the purpose of market access. Investments into developing Asia, especially China, also aimed at benefiting from cheap labor. Although China's labor costs have been rising lately, its consumers are getting wealthier.
Market access
Thus, market access may gradually become a more significant factor of consideration for South Korean companies. This is consistent with the fact that more South Korean FDI went into China's manufacturing sector despite rising labor costs.
On the other hand, China's ODI into South Korea was just US$341.7 million in 2012 - a measly 0.5 percent of total ODI. This is probably due to the fact that much of Chinese outward investment went to mining and natural resources. China is unlikely to find investment in South Korea's services sector attractive due to high labor costs and the small size of its market relative to China's.
South Korea's presence in China is becoming ever more apparent in particular industries. Against this background, it makes sense for China to deepen diplomatic ties with South Korea in the sphere of economic cooperation.
Yet, one cannot expect South Korea to fully replace Japan. Japan is still far ahead in terms of innovation and business sophistication. China's massive high speed railway system adopted Japanese bullet train technology, and China still imports a lot more transport and aviation equipment from Japan than it does from South Korea.
To better capture opportunities from the increasing presence of South Korea and capitalize on Japan's innovative strengths, China is now arranging discussions on the potential China-Japan-South Korea free trade agreement (FTA), and the next round of trilateral FTA talks are scheduled to happen in China this summer, followed by another meeting in Japan by the year end.
China is also engaging in bilateral exchanges with South Korea on trade partnerships. This sets the stage for strategic dialogues and more mutual cooperation in other areas as well. In the investment space, China can further open its industries for South Korean foreign direct investment by offering regulatory incentives. At the same time, China's manufacturing upgrade will invoke renewed interest from investors.
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