China will likely carry out another devaluation of its currency to prop up the world’s second-largest economy as it is tipped to face a slowdown in the long term, a senior Seoul official said Monday.
“Many economists predict an economic slowdown in China in the medium and long term because of an unstable stock market and a possible structural change in its economy,” Vice Finance Minister Joo Hyung-hwan said in an opening address at a seminar in Seoul. “In that case, the Chinese authorities may conduct further yuan devaluation.”
In August, China’s central bank devalued its yuan more than 4 percent to boost its exports in the world markets.
However, the devaluation fueled concerns across the world that the Chinese economy is worse off than expected, rattling the world’s stock and foreign exchange markets.
China is aiming to achieve an economic growth rate of 7 percent this year, marking the slowest expansion in 25 years, but global economists forecast that China will expand around 6 percent this year.
Along with the China risk, the vice minister said a possible U.S. interest rate hike is another big drag on the South Korean economy.
The U.S. Federal Reserve kept its key interest rate at a record low at its latest meeting last week, citing concerns over slumping global demand and unstable financial markets.
“The Fed held the key rate steady last week, but it just postponed its (rate hike) decision,” said Joo. “We have to map out comprehensive, systemic and balanced measures to cope with risks from China and the U.S.”
He said South Korea has strong enough fundamentals to overcome external challenges, referring to Standard & Poor’s latest upgrade of the country’s sovereign rating.
Last week, S&P raised South Korea’s sovereign rating one notch from A to AA-, citing the country’s future growth potential and a decline in external debt.
“Based on these strong fundamentals, the Seoul government will take pre-emptive actions to control household and corporate debt and carry out structural reform to achieve a better balance between domestic demand and exports,” said the vice minister.
Growing household debt has been Seoul’s policy bugbear as a higher U.S. rate could lead to raising interest burdens on many business and consumer loans.
South Korea’s household debt has been rising in recent months, reaching a record 1,130.5 trillion won ($948.4 billion) as of end-June, in tandem with four rate cuts by the central bank since August last year. (Yonhap)
