Why Beijing’s ‘boycott’ over missile defence system could really hurt South Korea
South Korea’s economic exposure to China leaves its tourism, consumer, auto and gaming sectors particularly vulnerable, analysts say
The economic muscle Beijing is employing to punish South Korea over the deployment of a US-backed missile defence system could have a profound effect on the latter’s economy, say analysts.
Its heavy reliance on exports to China leaves South Korea more exposed to boycotts of its goods and services than Taiwan and Japan – both of which have been similarly targeted in the past by unofficial ‘sanctions’ imposed by the mainland.
“South Korea’s economy over the last decade has really been geared towards selling to the Chinese consumer – everything from cosmetics to tourism to K-pop,” said Shaun Rein, managing director of China Market Research Group.
“The level of Chinese media attacks is much harsher towards South Korea because they know how much of Korea’s economy is geared towards China. It is easier to bully South Korea than Japan. Taiwan has back up plans due to ongoing tensions, while Korea does not.”
One thing that makes the boycott against South Korea stand out is that it is a joint initiative involving both the government and the public. The boycotts against Japan and Taiwan were mostly started by the people, said independent economist Song Qinghui, author of Interpretation of the New Normal Economic Phase.
“But the retaliation will also backfire to some extent, given a large number of joint ventures have been set up in China over the last few years while the bilateral relationship was in its honeymoon period,” said Song.
The US military on Tuesday said it had begun installing the Terminal High-Altitude Area Defense (THAAD) system, designed to protect against threats from North Korea. The announcement has angered Beijing, which has cited national security concerns.
The ground-based hardware is designed to detect and shoot down short- and medium-range ballistic missiles during the terminal phase of their trajectory.
Many observers believe Beijing is worried about THAAD’s cutting-edge radar technology which, at least in theory, could be used by the US against China.
China has taken increasing retaliatory measures against Seoul for allowing the system to be installed on its territory. Last week, news media in both countries reported that the Chinese tourism authority had ordered travel agencies in Beijing to suspend sales of all travel packages, both online and offline, to Korea, and that this measure is likely to extend to other regions in China.
“We are concerned that the Korean economy and the highly exposed sectors may face greater pressures from China if the dispute is not reconciled in the near future,” Credit Suisse economist Christiaan Tuntono wrote in a note last week.
The bank’s analysts predict China’s travel ban alone could shave at least 20 per cent off Korea’s GDP growth this year, currently forecast at 2.5 per cent.
“In 2016, Chinese tourists to Korea represented a hefty 47 per cent of total tourist arrivals and an estimated 64 per cent of total tourism revenue,” the note said.
“Besides tourism, Korea is also highly exposed to China on merchandise trade, with 25 per cent of gross exports (18 per cent on a value-added basis) bound for the country. Korean companies in automobile, electronics and media also have significant operations within the Chinese borders.”
When China was locked in a dispute with Japan in 2012 over their competing claims to uninhabited islands near Taiwan, angry Chinese citizens took to the streets, attacking Toyotas and Japanese-branded shopping malls and supermarkets.
Japanese automakers’ sales in China took a year to recover.
Similar “boycotts” against products from the Philippines and Taiwan happened when tensions heightened between the mainland and those countries.
Korean auto stocks fell by between 3 and 9 per cent last Friday and Monday, according to another research note issued by Credit Suisse on Monday.
“When the Senkaku/Diaoyu island disputes peaked in 2H12, the Japan’s Big 3’s (Toyota, Honda, Nissan) China sales volumes fell an average of 27 per cent year on year, versus China’s auto demand, which grew by 12 per cent,” the note said.
Although concerns about Korean vehicle sales in China could linger for several months, Credit Suisse believe the share price corrections are already overdone as the stocks fell by more than would be expected from the estimated impact on their earnings.
Another sector which could come under pressure is the consumer segment, particularly cosmetics and duty free shops. Analysts expect uncertainties over the next few quarters will weigh on Korean companies including Amore and LG.
The worst situation, according to analysts with Bank of America Merrill Lynch, would be “a consumer boycott of representative Korean brands”.
The primary target until now has been the Lotte Group, the firm that signed a land swap deal with the Korean government last week for the THAAD system to be set up on its land.
Many of Lotte’s retail outlets in China subsequently underwent inspections regarding adherence to fire and sanitation codes, and four hypermarket stores were shut down.
However, analysts with Credit Suisse said in their research note “the negative consumer sentiment towards Korean brands will not be as bad as in the case of the China-Japan case in 2012”.
Based on their analysis, both Amore and LG are more or less pricing in a 50 per cent year-on-year decline in sales at duty free shops.
Another sector that could find itself in trouble is South Korea’s gaming sector.
The share prices of Grand Korea Leisure and Paradise were down 8 per cent and 13 per cent respectively on March 3, as the bilateral tensions dampened the appetites of high-end Chinese gamblers, analysts with the bank wrote in another report.