Bank of Korea Sees Possible Impact From China Deleveraging Plan

(Bloomberg) -- The economy of South Korea, which is very reliant on China, may see more adverse impact than previously expected from China’s plan for deleveraging, the Bank of Korea said in a report on Sunday.

South Korea’s gross domestic product growth could be 0.3 percentage point less than expected in 2018 and maybe 1.2 percentage point less in 2020 because of Chin’s plan to cut financial risks by deleveraging, the central bank said in its report, citing data from Oxford Economics and Fitch. South Korea recently trimmed its forecast for growth to 2.9 percent for 2018 from an earlier projection of 3 percent, amid rising global trade tensions.

With the increasing possibility that financial risks such as shadow banking and corporate debts may have an impact on China’s real economy, preventing such risks will be the top priority for Chinese policy makers for a while, according to the Bank of Korea report. President Xi Jinping began in 2016 to curb risks in the nation’s financial markets and China has seen a record amount of bond defaults in 2018, according to the report.

With rising defaults at Chinese firms, risks have expanded for companies in Korea and other countries that have invested in the debt of Chinese firms, the Bank of Korea said, citing the case of Korean brokerages investing in the debts of China Energy Reserve & Chemicals Group Co. Still, the level of Chinese corporate debt defaults seems to be lower than in other countries, and it appears to be “a natural procedure” of restructuring zombie firms, according to Sunday’s Bank of Korea report.

To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Stanley James at sjames8@bloomberg.net, Colin Keatinge, John McCluskey

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