Chinese boycott over anti-missile system triggers US$3.3b sell off in Korean retail groups
China’s boycott of South Korean goods over the planned installation of a US-backed missile shield has wiped billions of dollars of market value off Korea’s largest retail conglomerates in just a few days.
AmorePacific Corp, the Seoul-based cosmetics behemoth that counts Laneige, Sulwhasoo and Etude House in its brand portfolio, has lost 20 per cent in market capitalisation, equal to three trillion Korean won (US$2.6 billion), since Monday last week, the same day Lotte Group, a Korean confectionary-to-mall conglomerate, agreed to supply land to host the anti-missile system, known as THAAD.
On Friday, shares in the lipstick maker slumped as much as 12 per cent, the company’s largest intraday decline in at least decade, after reports that Beijing had banned Chinese tour groups from visiting South Korea as part of its retaliation against THAAD, which has been strongly opposed by Beijing on national security concerns.
“All eyes are now on what Beijing is doing next. It seems that they are taking new measures every day... what if they decide to shut down Korean businesses altogether next?,” said a Seoul-based investment strategist, who declined to be identified due to the sensitive nature of the subject. “We are worried that the tensions are only going to intensify.”
Although aimed at protecting South Korea from potential missile strikes by the North – the two Koreas are still technically at war – THAAD’s radar can detect aircraft movements inside China, exposing Chinese military secrets to South Korea’s American ally.
Investors also dumped shares in major Korean duty free store operators, with Lotte Shopping Co. plunging 10 per cent and department store giant Shinsegae Inc losing 11 per cent over the last four trading sessions.
The three Korean consumer conglomerates have seen a combined 3.9 trillion won (US$3.3 billion) in market value evaporate since last Monday, according to South China Morning Post calculations.
“If you look at the Kospi stocks that dropped over 10 per cent these past few days, you will have a sense of what companies are being hit the most by the deteriorating relations [between China and South Korea],” the investment strategist said.
The immense popularity of Korean dramas such as Descendants of the Sun and pop stars like Song Hye-kyo and Kim Soo-hyun have triggered an influx of Chinese tourists to South Korea over the last few years. The K-pop craze also fuelled exponential sales of AmorePacific’s products ranging from lipsticks to eyeliners, which translated into a more than tripling of its share price between 2013 and 2015.
But Korean multinationals have recently been among the first to pay the price of a government-orchestrated boycott campaign in China against Korean products and services, first spearheaded by mainland state media but later spreading to the country’s consumers as well as the business community.
Some brick-and-mortar Chinese retailers and online shopping platforms have removed everything under the Lotte brand – from cosmetics to candy – from their physical and digital shelves. Already, more than 10 of Lotte’s Chinese outlets have been closed after inspections by authorities, according to Reuters.
The public backlash has escalated to a level where dozens of citizens protested in front of a Lotte outlet in northeastern Jilin province over the weekend, chanting slogans demanding pulling of Korean goods.
Market observers have raised concerns that the retail revolt against Korean entities may pass on costs to thousands of Chinese workers as Lotte, for example, employs over 20,000 people in China, its biggest overseas market.
Meanwhile, a possible travel ban on Chinese visiting Korea could bring further pain to the country’s retailers, particularly duty free store operators such as Lotte. On Friday, China’s tourism administration issued a notice regarding “an increase in incidents” where Chinese holidaymakers had been refused entry to South Korea’s visa-free Jeju island, warning citizens to “pick your destination with caution”.
Last week, South Korea’s semi-official Yonhap news agency reported Beijing had requested local travel agencies to stop selling group tours bound for South Korea.
No results appeared for searches for “Korea package tours” on popular mainland travel website Tuniu. Korea was nowhere to be found as an overseas destination on the homepage of Ctrip, China’s biggest online travel portal, despite the country having long been among the top five overseas magnets for Chinese travellers. Both Ctrip and Tuniu couldn’t be reached for immediate comment.
South Korea boasts the world’s largest duty free retail empire but it is highly reliant on big spenders from China, who account for about 70 per cent of total sales.
However, some experts believe the economic pain will be short-lived on hopes that the resentment will die down, similar to what happened to Japanese companies in the aftermath of sovereignty disputes over the Diaoyu islands, known as Senkaku in Japan.
“There are always ups and downs in Chinese relations with its Asian neighbours. Chinese are still flooding to Japan for vacations regardless of the many unresolved problems between the two governments,” said Zhao Huanyan, chief knowledge officer with hospitality and leisure consultancy Hotelsolutions Consulting. “Of course, they need time to digest.”