South Korea Sees Thaw in Ties With China Helping Economic Growth

(Bloomberg) -- South Korea expects economic ties with China to gradually improve, which should help sectors of its economy such as tourism and cosmetics that were hit after Seoul deployed a missile defense system. 

Better relations with China will help South Korea weather potential rough conditions next year, which may include a slowdown in construction, and support growth at a pace around the government’s forecast of 3 percent, Vice Finance Minister Ko Hyoung-kwon said during his first interview since his appointment.

“The government isn’t just trying to restore relations with China, but upgrade them to a more sophisticated level of cooperation,” he said.

South Korea and Beijing agreed last week to move past a year-long chilling of ties over Seoul’s decision to deploy the U.S.’s Terminal High Altitude Area Defense system, known as Thaad, in response to North Korean nuclear and missile tests. Beijing suspended package tours to Korea, while some South Korean companies operating in China, such as Lotte Shopping Co., faced difficulties there.

China is South Korea’s largest trading partner, buying about a quarter of its exports.

Ko declined to comment on the effects of a possible rate increase by the Bank of Korea. Buoyed by exports and fiscal stimulus, the economy expanded at the fastest rate since 2010 in the third quarter, raising expectations of a rate hike. Some economists expect one to come as soon as this month.

Trump’s Visit

The impact of tensions over North Korea’s nuclear program is a concern, but U.S. President Donald Trump’s visit to Asia is an effort to improve the situation and is unlikely to worsen it for now, Ko said. 

“U.S. President Donald Trump is visiting to solve the situation," Ko said. "I cautiously forecast, and hope, that the risks coming from North Korea won’t deteriorate further."

Last week’s move by China and Seoul to improve relations will also help, he said.

Won Strength

Reduced tensions with North Korea in recent weeks have attracted more capital inflows, which partly explains the won’s recent rally, Ko said. The Korean currency has been the strongest in Asia this year, gaining 8.3 percent against the dollar as of the market’s close on Monday in Seoul. It gained 1.5 percent in the week ended on Friday, the most since the week ending July 14.

“What the government is concerned about is volatility, and authorities perform smoothing operations to ease volatility,” he said.

The finance ministry is "strengthening monitoring" of currency markets, Ko said, though volatility in the face of geopolitical risk is lower than in the past. North Korean provocations in September, when it conducted missile and nuclear tests, didn’t shake markets the way they would have previously, he said.

--With assistance from Jaehyun Eom

To contact the reporters on this story: Hooyeon Kim in Seoul at hkim592@bloomberg.net, Jiyeun Lee in Seoul at jlee1029@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Henry Hoenig

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