Introduction: In terms of finance, because the capital market is fully open, South Korea has actually become a puddle created by the tide of the US dollar. In the field of advanced manufacturing, the Yoon Seok-yue government pursues "value diplomacy" in which ideology overrides the actual status quo, leaving Korean companies trapped in the "Schrödinger's Curse" of the United States.
[Text/Observer.com columnist Chang Luowen]
In the eyes of the Korean media, South Korea is a serious and wealthy developed country. Economic data from the International Monetary Fund (IMF) in November 2023 show that South Korea's real gross domestic product (gdp) in 2023 is US$3.1 trillion, making it a richer country than Saudi Arabia. Therefore, South Korea was particularly unconvinced when it lost to Saudi Arabia in its bid to host the World Expo. It felt that it was not because it had no money, but because it did not spend money seriously.
But looking back at 2023, which is about to end, South Korea’s economic performance data may not be what the Korean media wants.
With the epidemic completely over, South Korea’s economy has not ushered in the expected “retaliatory rebound.” Instead, the major livelihood issues such as housing prices, rents, and inflation that Yin Xiyue promised before taking office have not only been unresolved, but have continued to worsen. . On November 30, the Bank of Korea released an economic outlook revision report, lowering the economic growth forecast for 2024 by 0.1 percentage points to 2.1%, and maintaining the 2023 economic growth forecast at 1.4%. The 2023 consumer price index (CPI) forecast is raised by 0.1 percentage point to 3.6%, and the 2024 forecast is raised from 2.4% to 2.6%. The Bank of Korea predicts that it may not be able to achieve its 2% inflation target by the end of next year.
And because the capital market is fully open, South Korea has actually become a puddle created by the tide of the US dollar. If you can keep up with the U.S. dollar cycle, you can get a share of the pie, and you can also enjoy the dividends of the U.S.-led distribution system in certain industries. But if the cycle goes short, or if, like in recent years, American landowners have no surplus food and decide to suck up the water in the puddles, then South Korea will have a difficult time.
The first intuitive example is the recent thunderstorm in South Korea, which led to a series of tenant suicides. The crisis of all-rental housing (transfer housing) has not been properly resolved yet.
In South Korea, young people who have just entered the workplace and cannot afford to buy a house when working in the city (capital area) can use their personal credit as collateral to get a loan from the bank equivalent to about 1/2 of the full price of the house, and hand it over to the landlord. The original money will be returned after the lease term (usually 2 years) expires, and the landlord can freely use the funds during the lease term. On the surface, tenants do not have to pay rent to live in a big house, the landlord can speculate on larger properties, and the bank can also complete the loan task.
But this gameplay is based on credit, and there are two necessary conditions. One is that bank interest is low enough, and the other is that housing prices can be maintained at a reasonable increase level. Because after the landlord gets the money, the "safest" thing is to continue to pay the down payment to buy a house, then rent it out, and the cycle repeats. If bank interest rates are high, both tenants and landlords will have problems with their loans. The worst-case scenario is that housing prices skyrocket and plummet, and landlords are unable to refund the rent. Buying a house at a loss during a run cannot cover the cost, and they will often choose to run away in the end. Put the burden of mortgage debt on tenants.
With the Federal Reserve also in a state of low interest rates, South Korea’s capital area seems to have a steady supply of population, and housing is always in short supply. Korean speculators can make quick money without going abroad. In the past eight years, housing prices in Seoul, South Korea have been higher than those in Hong Kong. The increase is even greater. Once the United States raises interest rates to a certain level, a large amount of international capital will choose to return to the United States, including banking syndicates and capitalists who have analyzed the situation early and left in advance. When the Bank of Korea publicly follows the interest rate hike, the worst-case scenario mentioned above This has become an unfortunate reality for the poor in Korea.
The hard work of the poorest people in the world may end up being used unknowingly to support the "American lifestyle" of a few people. The South Korean government is indeed powerless to deal with this huge external force, but it cannot be justified for not correcting the shortcomings of the domestic housing market for many years.
Another industry affected by the tide of the US dollar is South Korea's former pillar industry-the shipbuilding industry.
Since large shipbuilding companies use huge financial leverage, the impact of bank interest on capital costs can determine the life or death of a company or even an industry.
Before the South Korean government raised interest rates, the Bank of Korea's interest rates were low and South Korean shipbuilding companies' financing costs were lower than their Chinese counterparts. This is enough to offset some of the labor costs for the Chinese.
Interest rate hike trends of the Bank of Korea and the Federal Reserve
But after South Korea followed the United States in multiple rounds of interest rate increases and China followed multiple rounds of interest rate cuts, the situation has changed dramatically.
Chinese shipyards can apply for yuan loans from the Bank of China to purchase materials and equipment domestically. Koreans, on the other hand, have to pay at least a 5% premium for interest. In the shipbuilding industry with transparent profits, this 5% can basically disqualify Korean companies from competing.
In the first quarter of 2023, the Korean shipbuilding industry had almost no new orders, and all orders went to Chinese shipyards. Things weren't much better in the second quarter. Due to an overflow of orders from Chinese shipyards, the delivery period of the new contract has been extended to three years. Orders began to overflow, and in the third quarter, orders received by Korean shipyards began to pick up.
It’s not like South Korea hasn’t thought about resisting, but there really aren’t many options. What has already been implemented is to delay the signing of the U.S.-South Korea currency swap agreement, to ban short selling in the stock market (the Korean stock market has the highest proportion of retail investors among the world's major stock markets), and to introduce some temporary policies to stabilize prices.
In the jungle of free and open markets, South Korea, which has followed the United States since its founding and has limited autonomy, can only do so much. Therefore, President Yun Xiyue chose not to focus on the mess of domestic affairs, but to focus on diplomacy. He is really a "smart man" in politics.
Of course the Bank of Korea knows what the problem is. After all, it did the same thing during the 2008 financial crisis. The Korean won exchange rate plummeted by half, and the luxury shopping malls in Myeongdong were not even willing to turn on the lanterns during the holidays. Therefore, the Bank of Korea stopped raising interest rates in February 2023 and has continued to do so until now.
Even so, the Shibor interest rate that China can compare with the benchmark interest rate is 50% lower than the Bank of Korea's benchmark interest rate. The "2022 Trade and Development Report" released earlier by the United Nations Conference on Trade and Development (unctad) believes that tightening money to combat inflation Policies may cause more serious damage globally than the 2008 financial crisis and the 2020 COVID-19 epidemic. The
report also found that for every additional percentage point the Fed raises interest rates, the economic output of other rich countries will fall by 0.5% within three years, while the economic output of developing countries will fall by 0.8%. U.S. interest rate hikes in 2022 alone could reduce future income in developing countries by $360 billion by pushing up the value of the dollar. As long as the Federal Reserve continues to push the Bank of Korea to maintain high interest rates, the problems facing South Korea will not be solved.
The involuntary nature of the financial market can also be understood as a necessary price for the two-way openness of the market. However, in the field of advanced manufacturing, the Yin Xiyue government still ignores objective laws and pursues "value diplomacy" in which ideology overrides the actual status quo. Commercial activities with Korean companies must wait for "ratification" from the United States before they can be truly effective, leaving South Korea's economic data has become more uncertain and unreliable, and South Korean companies are actually suffering victims.
On December 1, local time, the U.S. Department of Treasury and Energy issued new regulations on electric vehicle subsidies. According to the "Inflation Reduction Act", implementation details were promulgated. If the vehicle battery contains "sensitive foreign entities" (feoc) manufacturing For parts and core minerals, vehicles will not be able to obtain the tax deduction of US$7,500 per vehicle.
A so-called sensitive foreign entity is defined as any company owned, controlled or governed by North Korea, China, Russia or Iran. When the Chinese government directly or indirectly holds more than 25% of the board seats, voting rights or shares of a foreign cooperative company, it is also included in the list of "sensitive foreign entities". Starting in 2024, new energy vehicles eligible for exemptions cannot contain battery components manufactured or assembled by "sensitive foreign entities." From 2025, vehicles cannot contain "critical minerals extracted, processed or recycled by these entities". Cooperative companies with no Chinese government shares or private enterprises with low shareholding ratio will not be regarded as feocs. Because if all Chinese companies are excluded, the U.S. federal government’s electric vehicle subsidies will not be able to issue a dime.
Moreover, the U.S. government is not willing to be content with "you have a good plan, I have a wall ladder", and has set up a safety clause, stipulating that situations where (the Chinese government) has actual control over the production of minerals and parts will also be designated as feoc. This vague standard seems to negate the hard standard of 25% shareholding, and the subsidy approval logic has become a completely unpredictable black box.
Originally, the battery cooperative company established by South Korean and Chinese companies was gaining momentum, reaching at least 5 trillion won in 2023. In order to avoid the inflationary reduction bill, both parties have produced raw materials and production capacity, which is the honeymoon period. For example, LG Chem and China Huayou Cobalt have invested 1.2 trillion won, and Sk On, Eco Pro and China GEM will invest 1.2 trillion won to build a precursor factory in Saemangeum, Jeonbuk. LG Energy Solutions signed a Moroccan lithium hydroxide production memorandum with Yahua Group, a Chinese lithium compound manufacturing company, at the beginning of this year.
lg Chemical announced on September 24 that it signed a comprehensive cooperation agreement on the cathode material supply chain with Huayou Cobalt on the 22nd. The picture shows the signing ceremony scene. (Image source: LG Chemistry)
The "Schrödinger's Curse" introduced by the United States has forced Korean companies to be prepared to buy out some or all of the shares of Chinese companies, or even withdraw from joint ventures, resulting in huge financial pressure. Korean battery separator companies Skiet and LG Chem, which had originally agreed to set up factories in North America this year, also postponed their plans due to high policy risks.
The 2024 U.S. election is approaching. Republican candidate Trump and former South Carolina Governor Nikki Haley both advocate repealing the inflation reduction bill once they take office. Will Korea’s good days come if the ira is abolished? The answer is also no.
lg Energy's operating profit hit a record high of 731.2 billion won in the third quarter of this year, but this was achieved after adding ira's 215.5 billion won tax benefit. If the ira is repealed, LG Energy's operating profits could fall by 30%. If SK On, another Korean energy company that was already suffering from poor management, did not receive 209.9 billion won in U.S. subsidies, its deficit in the third quarter would be close to 300 billion won, and it would simply rely on subsidies to survive. The future of Korean battery companies is very unclear.
If you accept subsidies to quench your thirst, you have to accept the unpredictable and wanton slaughter of the United States; if you give up subsidies and start a new business and cooperate with China, although you have stable raw materials and advanced technology, you will be kicked out of the US-led distribution system that you originally relied on to survive, which may be ruined. In the darkness before dawn. The fundamental dilemma facing the Korean industry is that the right to choose is not in the hands of enterprises.
To be fair, the Yin Xiyue government at least made an effort to change the status quo, but the direction it chose was not quite right and it proactively put all its eggs in one basket. On December 12, South Korean President Yoon Seok-yue visited the Netherlands at the end of the year and visited the headquarters of semiconductor equipment manufacturer ASML. ASML also generously opened its clean room to President Yoon for a visit, and the Netherlands and South Korea announced the establishment of a "semiconductor alliance."
On December 12, local time, at the headquarters of ASML in the Netherlands, South Korean President Yoon Seok-yue (from left) and King Willem-Alexander of the Netherlands visited the clean room and listened to Chief Commercial Officer and Management Committee Member Christophe Fouquet ( Description by christophe fouquet. Yonhap News Agency/Joint Interview Group
ASML has reached a cooperation with Samsung and SK Hynix, and will invest 1 trillion won (approximately RMB 5.45 billion) to establish a semiconductor R&D center in South Korea. At the same time, it will work with SK Hynix to develop a device that significantly reduces power consumption. Hydrogen energy process. ASML will take the lead in establishing a cutting-edge semiconductor college in February next year, and graduate engineers from South Korea and the Netherlands will participate.
On December 12, local time, at the ASML headquarters, Yin Xiyue (third from left) held discussions with business people from both countries. Yonhap News Agency
Samsung Electronics Chairman Lee Jae-yong, SK Group Chairman Cui Taiyuan, ASML CEO Peter Wennink, Benjamin Luo and other entrepreneurs held strategic dialogues on the prospects of the semiconductor industry and bilateral cooperation at the meeting that day. King Willem-Alexander of the Netherlands also attended.
On December 12, local time, at the ASML headquarters, Samsung Electronics President Qing Guixian (left) and ASML CEO Peter Wennink signed a memorandum of understanding on cooperation on the establishment of a new generation semiconductor manufacturing technology R&D center. .Yonhap News Agency/Joint Interview Group
This is the first time that ASML has opened its clean room to foreign leaders for a visit. It shows ASML’s sincerity and determination, and more importantly, it shows that South Korea is “one of its own” in the U.S.’s chip technology system. certification. But the more "friendly shore outsourcing" is replaced by "technical alliance", the harder it will be for the outside world to believe that South Korea's economic data is a true reflection of independent economic construction, and the harder it will be for the outside world to believe that South Korea can make independent and rational decisions when there are variables in cooperation. .
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