Politics to plastic surgery: China and SKorea play a game of hard and soft power

For a country just slightly larger than Indiana, South Korea has for years punched well above its weight,

It’s family-owned conglomerates, known as chaebols, have made a mark around the globe: think everything from Hyundai cars to Samsung smartphones. Its pop culture has influenced fashion and music worldwide. And Korean companies have provided many of the advanced technologies powering manufacturers in China, the world’s factory.

But the importance of South Korea to China, and other major powers, goes beyond business.

South Korea is central to a complex geopolitical situation, with the belligerent North Korea on its heels, while superpowers U.S. and China jostle for hegemony in the Asia Pacific. How South Korea navigates its relationships with Washington and Beijing could have profound implications for the region and its economy.

A case in point is the U.S.’ impending deployment of the Thaad missile system on South Korean soil to help counter further threats from Pyongyang. This move, however, has angered neighboring China, who sees the move as threatening to its security interests.

In an interview with Yonhap news agency last year, South Korea’s outgoing ambassador to China cautioned about Seoul’s position between the two allies and urged the country to consider how to balance its relationship with the two.

“Although Korea-China and Korea-U.S. relations are not said to be a ‘zero-sum game,’ there could be a situation where we are forced to make a choice between the two relations,” Kwon Young-se warned.

When it comes to trade, Seoul and Beijing have a lopsided relationship, according to statistics from the World Trade Organization. South Korea’s exports to China made up a quarter of its total shipments, while exports from China to South Korea made up less than 5 percent of its trade.

Unsurprisingly, China’s slowdown has hit South Korea hard. Moody’s expects real GDP to slow to 2.5 percent this year from 2.6 percent in 2015. The slowdown would be down from average growth of 3.7 percent from 2010 to 2014.

Barcelona-based FocusEconomics said in a recent report that the South Korean economy would continue to “struggle with lethargic exports” this year due to weak growth in China and as analysts remained skeptical over the efficacy of a massive $17 billion stimulus plan. Economic sentiment had remained depressed despite mild improvements in May industrial production and manufacturing PMI, FocusEconomics noted.

South Korea [is] more reliant on China not just for export growth but to fuel domestic industries, particularly those linked to tourism and cosmetics ,” said BMI Research’s Asia analyst, Chia Shuhui.

The relationship is dynamic, however, since China relies on South Korean imports of intermediate inputs such as smartphone components, that will then go into higher value-added products shipped from China, Chia added.

South Korea’s garnered capital flows, positioning itself as an attractive destination for Chinese companies wishing to expand as well companies looking to get a foothold in China.

Despite a tough economic environment globally, South Korea attracted $10.5 billion in new foreign direct investment (FDI) commitment in the first half of 2016, a 19 percent rise over a year ago, the Ministry of Trade, Industry and Energy announced in early July.

FDI pledges from China jumped almost 80 percent from a year ago to $710 million as the East Asian giant transitions to a service-led economy.

According to data compiled by Bloomberg, Chinese investments in South Korean companies soared 119 percent in 2015 to $1.9 billion, led by deals in the insurance, technology, health-care and cosmetics industries, the news agency reported in December.

South Korea’s nearness to China also lured investors from elsewhere. The European Union’s FDI pledges stood at $4.21 billion, a threefold increase, as European companies eyed South Korea’s proximity to China to set up research labs or manufacturing plants to export to China.

As for South Korea, its FDI into China for the first four months of 2016 was 2.02 billion, according to China’s commerce ministry.

According to data by South Korea’s Financial Supervisory Service, foreign investors held a total of 97.4 trillion won ($85.2 billion) worth of Korean bonds as of March 31.

China was the largest holder of South Korean bonds, holding 18.4 percent of South Korea’s outstanding debt. The country stopped publishing bond holders by country after March.

As of the first quarter of 2016, general government external debt is low in Korea at $66.8 billion or 15 percent of the total general government debt, Moody’s told CNBC.

The external debt amount was 4.8 percent of nominal GDP in 2015.

But it wasn’t all one-way traffic. In December 2015, South Korea became the first country to sell a yuan-denominated bond in China’s domestic market.

South Korea and China also share a relationship that spans centuries. Even now, the largest group of ethnic Koreans living outside the Korean Peninsula is in China where descendants immigrants are among the 56 ethnicities in China officially recognized by the government.

Although early Korean states were tributary nations to China, the South Korean influence on its bigger neighbor is now pervasive as Seoul relishes its moment in cultural exports.

For the last decade, South Korea has been shipping its television programs and pop music the world over, particularly to China, where Korean celebrities are given the royal treatment. This in turn has burnished the marketing appeal of lifestyle products featured in the programs, including smartphones, cars, beauty products and boosted tourism.

The current squabble over the Thaad missile system, may, however, temporarily dampen this affection.

TV stations in the Chinese province of Guangdong have been told by the country’s media regulator that new approvals for shows featuring South Korean popstars would not be granted in the near future, the South China Morning Post reported this week, citing sources.

Chinese Communist Party-run newspaper Global Times published an opinion piece on Thursday, meanwhile, saying South Korea had only itself to blame if the popularity of its pop culture exports faded.

“It’s not China’s fault if South Korean stars eventually become the scapegoat of the Thaad deployment,” the editorial said.

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