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Friday, July 4, 2014, 10:01

Ties that bind

By KRISTINE YANG in Hong Kong / Asia Weekly

But over the past couple of years the pattern of growth has changed and slowed, at times even showing decreases. South Korea’s exports to China decreased 9.4 percent in May compared with a year earlier. That was the first drop since February 2013 and marked a turning point in the pattern of rapidly growing bilateral trade.

“The trade situation is not that good this year,” says Cho.

In 2013, South Korean exports to China grew 8.6 percent while Chinese imports grew 2.8 percent, which is lower than before, he says, adding that this does not mean the relationship between the two countries is deteriorating, but rather reflects the “trade structure”.

“A large part of Korean exports to China is raw materials, but China’s economic structure is changing. It emphasizes more domestic demand and consumption now. Korea needs to change accordingly.”

South Korean policymakers are responding to the changes, partly by shifting their patterns of production and by focusing on new sectors. In the latest three-year plan, President Park has pledged to bolster the service industry to reduce the country’s dependence on exports.

“Usually the trade statistics don’t reflect the service industry, but Korea’s cultural industry is definitely playing a role in the economy,” says Cho. “Korea’s investment in China was more in the manufacturing sectors. Now the financial and cultural industries are more and more important for us.”

This is visible in the way the world perceives South Korea. Its music, dramas and fashion have gone global.

A variety of service sectors are growing as well, in no small part thanks to trade links with China.

In March, South Korea approved its very first foreign-owned casino, a joint venture between Las Vegas-based Caesars Entertainment and Hong Kong-listed property developer Lippo.

The Caesars and Lippo casino will be located near Incheon International Airport and will include hotel and shopping attractions. The participation of a Hong Kong-listed company suggests that Chinese gamblers will make up an important client base. And these gamblers would need easy access to the country.

Sega Sammy of Japan and Genting Singapore, the biggest casino operator in Southeast Asia, are also considering getting a casino license.

Earlier this year, Genting Singapore announced plans to team up with Hong Kong’s Landing International Development to build a $2.2 billion resort complex on Jeju Island, including a casino with 700 tables. The complex could open as early as 2017.

Meanwhile, Chinese property developer Greenland Group is planning to invest in Jeju Dream Tower — a 218-meter-high complex including hotel and retail attractions and entertainment — with South Korea’s Lotte Group. The investment is valued at 6 billion yuan ($967 million).

The developments open new avenues for investment in China, avenues which a trade link would make easier to navigate.

The importance China is placing on exploring and widening these new avenues suggests the largest economy in Asia is looking to take its trade relationships further. The nation is working on transforming its economy from an investment-led one to a more value-added one, spurred by greater consumer demand.

“The growing presence of two-way trade means that both sides cannot afford to upset the balance,” says Ross O’Brien, director and chief economist at the Economist Corporate Network in Hong Kong. “China is kind of dependent on regional partners for trade — perhaps not as much as the other way around, but it is two-way trade.”

“It is not a zero-sum game. Trade doesn’t go from one place to another because costs rise in the first destination,” he adds.

For example, although Vietnam has taken some of China’s manufacturing, China’s exports to Vietnam are much higher than Vietnam’s exports to China. For Vietnam, China accounts for almost one third of the country’s imports. And even as Vietnam takes over some manufacturing, China retains a lead in the production of high-value-added products.

Not entirely different is the situation in South Korea, a much more developed economy than Vietnam and a member of the Organisation for Economic Co-operation and Development. But despite, or because of, its high-value-added economy, South Korea needs China.

“South Korea is dependent on exports but it is still producing quite a lot and, like the US, it owns a lot of technology brands, like Samsung. But they don’t manufacture the phones in Korea. So China, as a manufacturing station, is very important,” says O’Brien.

“China is also increasingly important for Korean brands,’’ such as certain categories of clothing, says O’Brien. And he adds that South Korea has been a success at increasing its cultural exports to China.

South Korean companies worry about the increasing competitiveness of Chinese companies, says Cho, adding that this is at “company level” and not the country’s concern. “When the trade between two countries is increasing, the country’s interest should be more important.”

The increased links between China and South Korea are certainly beneficial to the economies of both countries but have raised concerns elsewhere, most notably Japan.

“Japan does worry about Korea’s trade with this large economy as it may hamper Japan’s own trade,” says Cho.

China, South Korea and Japan have been in negotiations for a separate three-way free trade deal since 2012. Such a deal between these three countries — which account for 70 percent of total trade in Asia — has the potential to significantly impact the region.

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