China, World Economy and Korea-China Economic Cooperation

The recent Chinese Communist Party Congress elected a new leadership that will lead China over the next decade. Under the previous, “fourth-generation” Hu Jintao leadership, China’s economy grew at an astounding pace, with China becoming one of the world’s largest economies and also one of the most powerful countries. The process of this rapid economic growth, however, also revealed deep structural contradictions in China and the increasing susceptibility of the Chinese economy to worldwide recession set off by the financial crisis in the West. Students of the Chinese economy argue that, in order for China to ensure sustained development, it must take care not to fall into two traps: that is, the middle-income trap and the system transition trap. Although China is still the world’s most populous country, the size of its workforce for manual labor is now in a steady decline. The traditional manufacturing sector is vulnerable to oversupplying, while other developing countries are industrializing at a pace that may soon threaten the industrial prospects of China. The growth rate of the Chinese economy has accordingly slowed down in recent years. In the meantime, disparities in wealth along regional and class lines continue to increase, while a pervasive culture of corruption adds to widespread social anxiety. As the elite increasingly pursue self-serving policies, popular resentment is growing against the policy of continued economic reform. Under the new leadership, China will fundamentally alter its approach to economic development, seeking to discover and develop new sources of growth. The framework of “development through innovation” will replace the framework of “development through input expansion.” Nurturing domestic consumer industries and markets will take priority over encouraging exports and foreign investments. Development no longer should degrade the environment but will become more eco-friendly, while the overall energy-dependent economic structure will gradually give way to a new and energy-saving economic structure. Industrialization will no longer be led singlehandedly by the manufacturing sector but will depend more and more on the new strategic industries. At the macroeconomic level, China will strengthen its ties to neighboring countries in the region through the expansion of free trade agreements. It will also seek to globalize the Yuan so as to facilitate Chinese investors’ activities overseas. These mid- to long-term changes will exert significant influence not only on the prospects of the Chinese economy for growth, but also the Korea-China economic relations as well as the entire international economy. The shifts in the approach to economic development will inevitably slow down the growth rate of the Chinese economy, ending the age of high-speed growth and ushering in a new era of middle-speed growth. The new approach to development and the accompanying slowdown of the Chinese economy will also affect the prospects of economic partnership between Korea and China. South Korea has been one of the biggest beneficiaries of China’s rapid economic growth over the last two decades. As China grew to become “the world’s factory” and a major export powerhouse, Korea profited handsomely by providing intermediate goods that the Chinese manufacturing sector needed for the processing trade. This has enabled Korea to maintain a stable surplus in its trade balance with China. Korean companies also invested heavily in China, seeking new impetus for growth there. Now that China’s society and economy are expected to undergo radical transformation, no one can say with certainty that this mutually beneficial arrangement will continue to be so between the two countries for the next two decades as well. As China will increasingly seek to promote its domestic industries and reduce its emphasis on export-oriented growth, Chinese demand for Korean exports will concomitantly decrease. Given the fact that Korea specializes in supply