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China Briefings

Reports on China issued by Samsung Economic Research Institute

Implications of China's Financial Market Opening Drive

Implications of China's Financial Market Opening Drive

Samsung Economic Research Institute Beijing Office

Sept. 14, 2006

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For years, there has been much concern about China's hard landing and the follow-on impact on Korea's economy as the two countries expand and deepen economic relationship. Up until now, however, that concern was mostly focused on the economy's "real" sector; that is, the part of the economy engaged in producing actual goods and services as opposed to the money-handling financial sector.

As the Chinese authorities tighten money supply in efforts to release the steam out of the overheating economy and thereby avoid a hard landing, the scenario goes, it will trigger a reduction in import demand as well as domestic demand, which will again adversely affect Korean exporters.

Fortunately, the concerns on the real-sector risk have not materialized, as the Chinese economy continues to register healthy growth amid low inflationary pressure. China's economy has grown by more than 9% for the past 11 consecutive quarters until the first quarter of 2006, while consumer prices have been below 2% since early 2005. Exports and investment continue to grow by more than 20%, and consumption also records two-digit growth.

All these point to high expectations that China's economic growth at blistering pace will continue for some time to come, relieving the concerns of a sudden downturn.

Meanwhile, the fear is arising over the impact of China-originated financial risks on Korea's financial markets, especially if the Yuan gets more volatile over time. China's financial sector undergoes a major reform as it opens up to foreign competition, which may have repercussions on the Korean economy as well.

With the scheduled termination of the WTO-sanctioned grace period approaching, Chinese authorities are busy preparing for reforming their financial services. Foreign investment in China's financial sector has remained small until the opening of the country's financial markets. Overall, foreign investment in China was US$72.4 billion in 2005, of which that in the financial sector accounted for US$12.0 billion, or 17% of the total.

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