On Could 27, Chinese language Premier Li Qiang vowed a “new begin” in a trilateral summit with South Korean and Japanese leaders, the place they reached a general consensus on future cooperation in varied areas. Whereas this “refresh” could possibly be a optimistic signal for South Korea and China to enhance their financial ties, evolving bilateral dynamics, intensifying geopolitical stress, an unsure Chinese language financial system, and a extra aggressive relationship within the world worth chain pose critical challenges for 2 international locations’ financial relations.
Evolving Financial Ties
China has been South Korea’s most important commerce accomplice for the previous decade. This stays true regardless of the THAAD controversy in 2017 – when Seoul agreed to deploy the U.S. missile protection system, and Beijing responded with financial coercion. The episode undermined China-South Korea ties, and several other sectors together with automotive, retail, tourism, and leisure suffered, but the 2 economies stay extremely built-in.
Lately, nonetheless, South Korea’s financial ties with China have waned. For the reason that pandemic, this relationship has notably retracted. China’s share of South Korea’s complete exports has fallen from 25.9 p.c in 2020 to 19.7 p.c in 2023, in line with the Korea Customs Service, whereas exports to the U.S. elevated from 14.5 p.c to 18.3 p.c throughout the identical interval.
At one level in 2023, South Korea’s export share to the U.S. surpassed the one to China, the primary time in 20 years (see Determine 1 under). In 2024, South Korea’s export share to america (19.3 p.c) even surpassed China (18.8 p.c) for the entire quarter.
As well as, South Korean international direct funding (FDI) in China in 2023 additionally dropped considerably, right down to about one-fifth of its 2022 stage, whereas the FDI within the U.S. surged by roughly 180 p.c in comparison with 2020. In 2023, South Korean funding in america was almost 15 instances bigger than its funding in China (see Determine 2). This was additionally the primary time since 1992 that China was excluded from South Korea’s prime 5 locations for outbound FDI.
These shifts immediate three important questions: What drives these adjustments? Are they long-term structural shifts or a short-term blip? What does this imply for the way forward for China-South Korea financial relations?
Key Driving Forces
In 2023, semiconductors accounted for 20.7 p.c of South Korea’s complete exports, the very best amongst its industries. System semiconductors and reminiscence semiconductors constituted 33.8 p.c and 29.2 p.c, respectively, of the whole semiconductor exports.
One main issue contributing to South Korea’s declining exports to China is the reducing semiconductor exports prior to now two years because of cyclical market demand and China’s rising self-sufficiency in semiconductors (though the market has witnessed rebounds for the previous seven months). In 2023, South Korea’s semiconductor exports to China hit their lowest stage since 2016, and reminiscence exports fell to their lowest since 2019 (see Determine 3).
Furthermore, the 2017 THAAD controversy, China-U.S. commerce struggle commencing in 2018, and provide chain disruption through the pandemic have reshaped the commerce ties between South Korea and China. These occasions have underscored the rising geopolitical threat and the vulnerabilities inside the world provide chain, prompting Korean corporations to pursue higher diversification from China, shifting focus towards the U.S., ASEAN, and Europe since 2013, offsetting the diminished share of exports to China (as proven in Determine 1).
China’s financial slowdown additionally contributed to South Korea’s reducing exports to the nation as its home demand has been weak, stemming from a number of components akin to restricted authorities stimulus measures, an actual property disaster, excessive youth unemployment charges, and low market confidence.
This unsure financial panorama has difficult the calculus for South Korean firms and led them to undertake a extra cautious funding method. In 2023, South Korea’s FDI into China plummeted by 78 p.c. This aligned with broader worldwide sentiment towards China, as earlier knowledge reported China’s record-low influx FDI. On prime of that, China’s volatile financial coverage through the pandemic, coupled with perceived insufficient market assist has additional compounded the uncertainties amongst South Korean traders.
China’s evolving regulatory surroundings with a higher emphasis on nationwide safety has additionally raised considerations amongst South Korean traders. Though Chinese language President Xi Jinping has advocated for a “pro-business China” to draw international funding and refine its world picture, latest legislations and actions towards international enterprise have forged extra doubt on China’s enterprise surroundings.
For South Korean corporations, notably high-tech FDI contributors in China like Samsung and SK Hynix, essentially the most regarding however predictable issue is the sustaining stress on commerce and know-how between the 2 superpowers. Because the geopolitical threat in strategic sectors will increase and is predicted to escalate, South Korean corporations have re-evaluated and halted their funding in China. As an alternative, main tech firms are investing in america to reap the advantages of commercial incentives offered by the CHIPS and Science Act and Inflation Discount Act, in addition to sidestep geopolitical backlash.
This shift is obvious within the growing investment in semiconductor and clear vitality and the numerous decline in South Korean high-tech funding in China. Particularly, South Korea’s semiconductor funding in China witnessed a 99.8 p.c year-on-year lower in 2023.
China’s Transfer Up within the World Worth Chain
One other main issue is China’s rise within the world worth chain, which has shifted its financial relationship with South Korea from complementary to aggressive. In response to McKinsey, China’s share within the world manufacturing trade has increased from 19 p.c in 2010 to 34 p.c in 2023. China additionally lately claimed it has achieved 86 p.c of the objectives of “Made in China 2025.”
This transformation has led to elevated competitors in semiconductors – essentially the most pivotal South Korean export and funding in China. Though South Korean chipmakers nonetheless lead in high-end logic and reminiscence chips, China is gaining floor within the low-end market. Since 2015, China’s share of South Korea’s logic and reminiscence chip exports has diminished. China used to characterize almost 70 p.c of South Korea’s built-in circuits (ICs) exports and near 80 p.c of its reminiscence exports in 2015. Nonetheless, these figures diminished to 57 p.c and 73 p.c in 2023, the bottom since 2015 (see Determine 4), amid the dwindling exports of DRAM and Flash reminiscence over the previous 5 years.
Whereas South Korean corporations stay dominant in cutting-edge recollections globally and ahead of Chinese language reminiscence makers, Chinese language firms like Yangtze Reminiscence Applied sciences Co. (YMTC) and ChangXin Reminiscence Applied sciences (CXMT) are progressively bettering their reminiscence applied sciences and manufacturing, albeit slowly, to compete for market share in opposition to Korean corporations in China
Rising rivals like Semiconductor Manufacturing Worldwide Company (SMIC), CXMT, and YMTC have regularly expanded their manufacturing and refining applied sciences regardless of rising restrictions from america. Coupled with the Chinese language authorities’s push for home corporations to accumulate extra Chinese language chips, these firms are poised to progressively seize extra market share in logic and reminiscence semiconductors, difficult South Korean corporations.
Past the semiconductor trade, Chinese language tech corporations have intensified competitors with South Korean corporations within the cell phone, EVs, and battery sectors. A 2023 report has suggested that the gross sales of 113 huge Korean firms have dropped by 13.1 p.c since 2016.
Contemplating these developments, it’s hardly shocking that South Korean firms have gotten reluctant to put money into China, particularly these in high-tech sectors, because of considerations about market potential, rising competitors, present and potential U.S. restrictions, rising operation prices, generally cited mental property, and know-how leakage. There may also be considerations that high-tech FDI may inadvertently strengthen China’s high-tech sector, enhancing its future competitiveness.
A Structural Shift Fairly Than a Quick Blip
These adjustments point out a structural shift slightly than a short-term blip in China-South Korea commerce for 2 primary causes.
First, the aggressive financial ties between China and South Korea are set to accentuate. China is predicted to ascend additional within the world worth chain, pushed by a Chinese language authorities that has more and more emphasised know-how’s function within the nation’s nationwide technique and is more likely to place it as prime precedence after the Third Plenum in July.
Second, South Korean corporations are anticipated to proceed diversification efforts to handle the rising dangers in geopolitics and provide chain in years to return, particularly amid the sustained China-U.S. tensions with the danger of additional escalation. Admittedly, one issue that is still unknown and debatable within the equation of this relationship is the prospect of the Chinese language financial system – a pivotal issue that impacts the 2 international locations’ financial cooperation.
Whereas this financial relationship has entered a tougher part, it stays important to each international locations. As an example, a Could survey revealed that almost all Chinese language and South Korean enterprise leaders take into account financial cooperation needed.
Policymakers in Beijing and Seoul clearly perceive the significance of managing this bilateral financial tie and have taken some preliminary steps searching for to navigate the present dilemma. Two international locations have lately resumed the second part of negotiation for the ROK-China FTA which has been halted since 2015, and the Korea-China Funding Cooperation Committee after its suspension in 2011. Past resuming present dialogue, two sides additionally established the “Korea-China 2+2 Diplomatic and Safety Dialogue” and the “Korea-China Export Management Dialogue.” But, it stays unclear how efficient these dialogues may be in bettering bilateral ties.
Ultimately, although it’s unrealistic to anticipate China-South Korea financial ties to be as vibrant as they had been within the 2010s, the 2 economies are more likely to stay pretty built-in.
