Background of Relations
Relations between these two states, economic or otherwise have always been close. Korea was content to look up to China for centuries as the centre of world civilisation, this relationship meant that starting in 1637, three official embassies from Korea travelled to China every year. These travels occurred during the New Year, birthday of the emperor and the birthday of the crown prince. The inauguration of a new king in Korea or the death of an emperor in China required special missions. The Korean kings seeked and wanted the approval of the Chinese Emperor otherwise known as the “son of heaven”. These missions could be seen as early trade envoys, the Korean king would send gold and silver as well as skins of precious animals to Beijing whilst the emperor would send back the best quality silk, herbal medicines, pottery and libraries of books. Tribute trade was a cultural exchange as well as an economic exchange between the two states. Language wise, roughly 50% of Korean vocabulary have Chinese origins and could be written with traditional Chinese characters (Hanja).
When invading Japanese forces attacked Korea in the 1590s, Chinese troops were sent to help repel them. This relationship has lasted well into the 21st century and played a strong part in the Korean War which resulted in the division of the peninsular. Chairman Mao personally refused to intervene to stop his eldest son to be sent to Korea and was subsequently killed in the Korean War as a Chinese volunteer.
In the beginnings of the last century, exiled Korean governments organized liberation movements and set up in the Chinese cities of Shanghai, Nanjing, Wuhan and Chongqing to fight against Japanese colonial invaders.
China (PRC) has risen above the depressions and atrocities (economic and otherwise) of the past two centuries and continued process of retaking its place in the world as a major power rivalling that of the United States, as of January 2009, China overtook Germany as the world’s 3rd largest economy. Rising from the Asian financial crisis and the after-effects of the Korean War, South Korea (ROK) has also risen to a major economy in the world, being Asia’s third largest economy (after Japan and China). Today, PRC is ROK’s largest trading partner.
Political-Economic History of PRC and ROK (Post WWII – 1990)
The People’s Republic of China
(Five Year Plans, Great Leap Forward, Cultural Revolution and Market Reforms)
After defeating the Nationalist Party (Kuomintang), in October 1949, the Chinese Communist Party (CPC) proclaimed the establishment of the People’s Republic of China (PRC). Wealthy landlords and peasants immediately had assets and land confiscated and redistributed to poorer peasants. Titles to roughly 45 percent of arable land were redistributed from wealthy owners to families that had previously owned little amounts to no land at all. The ultimate goal of the CPC was to transform the China into a powerful, industrialised and modern nation. This would mean industrialization, improvement of living standards, production of modern military equipment and narrowing the income gap. From 1949 to 1952, the chief concern of the government was to restore China’s economy to normal working order. The CPC quickly repaired infrastructure such has transportation and communication links to restore economic activity. A central banking system was also established.
In the 1953, the first 5 year plan begun. This policy aimed to achieve fast growth rates in heavy industry and was achieved. Soviet technicians, economists, scientists amongst other personnel helped the PRC develop this plan. Equipment for industry was also purchased from the USSR. State control over all forms of industry was increased during this time by introducing financial pressure and incentives to convince owners of private firms to sell them to the PRC. By 1956, privately owned firms had ceased to exist, 67.5 percent of modern industrial firms were state owned and the rest were joint public-private ventures. Agricultural sector also went through vast changes. From the mutual aid teams within communities, villages of farmers were to ascend into early forms of agricultural collectives. Economically the first Five-Year plan was largely successful, key industries such as iron and steel manufacturing, cement production, machine building and electricity generation expanded rapidly.
Whilst changes were happening, certain prominent members in the party such as Liu Shao Qi argued against Mao’s radical stance and expressed that change should be gradual and collectivization of the agriculture industry should wait until industrialization has occurred.
However, the extensive economic growth would come to a halt when the second Five-Year plan was introduced; it was dubbed “The Great Leap Forward (GLF)” by Chairman Mao. Ironically, this “great leap forward” was practically many leaps backwards in terms economic development and triggered various social upheavals which would haunt the economy and the society of China for many years to come. The GLF was intended to dramatically increase steel and agricultural production to twice the amount that was produced in 1957. As peasants were poorly educated and ill equipped, too much low quality steel had been produced. Local authorities quite often reported unrealistic and unreachable production statistics to hide the problem. Even though that steel production had indeed increased by almost 3 times as much, most of the steel produced was impure and useless and was unable to be used for its intended purposes: the production of machinery for industry and weaponry for the military.
The GLF has since been reviewed and approached as a huge economic disaster. Chairman Mao stood down as the State Chairman of the PRC in 1959 presuming he would take most of the blame and responsibility of this failure in policy. Economic recovery and progress seemed reachable under new leadership that aimed to make Mao a figurehead, realised this Mao initiated the “Great Proletarian Cultural Revolution” otherwise simply known as the Cultural Revolution to expel his political enemies who included Liu Shao Qi beand Deng Xiao Ping whom later succeeded as de facto leader after Mao’s death. This Cultural Revolution further crippled the Chinese economy and society with the abolition of tertiary education and persecution of senior academics, doctors, politicians amongst others by the youth league formed by Mao otherwise known as the “Red Guard”. Plans such as the “Down to the Countryside Movement” aimed at sending privileged urban youth to mountainous areas or countryside farms to learn from the workers and farmers increased the destructiveness of the Cultural Revolution as many high school graduates were forced out of cities and exiled to remote areas of China. Although Mao himself declared the revolution to be over in 1969, the period of unrest remained from the power struggles between factions within the party until the death of Mao in 1976.
Deng, who was previously purged from the party, slowly emerged as the de factor leader of the country in the few years after the death of Mao. Immediately policies that prevented “land lord class” citizens to join the communist party were removed. Though Deng provided the political support to allow economic reform to occur, Deng‘s economic were not originally conceived by him and only furthers those by previous party leaders such as Liu Shao Qi and Zhou Enlai. Deng’s proposed reforms included planned and centralized management of the macro-economy but management was unlike Mao’s model which included vast projects and campaigns to construct the economy, Deng’s management was indirect through market mechanisms that were free to an extent. Deng had also decided to advance modernization speed by stepping up the volume of foreign trade conducted with purchases of machinery from countries other than the USSR. There reforms were a complete u-turn of policies and philosophies of self reliance set by Mao himself. Under this new program, relations with foreign nations improved drastically. Deng travelled to meet with western leaders and became the first Chinese leader to visit the USA in 1979. The UN also switched recognition from the ROC (Taiwan) administered by Kuomintang to PRC.
The Republic of Korea
(Korean War, Political Instability and Five Year Plans)
Korea had been in a state of unrest for many years leading up to and after WWII. Japanese occupation before and during WWII crippled Korea in all ways possible. After being unified since the 6th century, Korea was divided at the 38th parallel by the USA (occupying the south) and the USSR (occupying the north). The USSR agreed to the 38th parallel being the demarcation between the occupation zones in the Korean peninsula. In December 1945, the US and USSR agreed to administer the nation under the US-Soviet Join Commission. It was agreed that Korea would be allowed to govern itself independently after five years of international oversight. Both the US and USSR would proceed to endorse their own sponsored governments as the inheriting government of the peninsular and an agreement could not be reached. The majority of the South Korean population disapproved of further foreign rule and occupation within Korea as it had been occupied by the Japanese for almost 35 years prior. The US called for an election to be held in all of Korea but the USSR refused. During this time separate governments were established. Both these governments had the vision of uniting Korea under their respective system. Yi Seungman (aka. Rhee Syngman) was appointed the head of the Korean government with strong backing by the United States whilst Kim Il Sung was chosen by Stalin himself to lead. These de facto governments intended to run all of Korea became governments for their respective geographic associations on each side of the 38th parallel. Initially Kim’s proposal for military aid from the USSR and PRC were refused by the USSER, but with the withdrawal of US troops from the south and the development of Soviet nuclear weapons, Stalin soon reconsidered Kim’s requests. Soon after receiving Mao’s support and promise to send troops to aid Kim, Stalin approved the invasion to reunite Korea by force under the communist structured government. On June 25, 1950 Kim escalated small battles into a committed offense and crossed the parallel with huge numbers of troops. The South Korean army were ill equipped, poorly trained, inexperienced and were caught by surprise. Kim quickly captured Seoul and Yi’s forces were forced into a pocket around Busan. Tides quickly changed as UN and US forces arrived and pushed Kim’s forces back into a small pocket along the Chinese/Soviet border, fortunes once again changed when Mao’s forces were sent in to repel the US troops, pushing them back close to where the original border was drawn. Since then a ceasefire was declared, however the two sides are technically still at war as an official peace treaty had never been signed.
A period of political instability followed the split of the peninsular; in 1960 a student uprising overthrew Yi’s government and established 2nd Republic of Korea, Yi peacefully resigned. On May 16, 1961, a group of military officers supported a coup that overthrew the 2nd Republic of Korea, lead by General Park Chung Hee. Though it was the government of the 2nd republic to have originally conceived the plans, it was the military government (Supreme Council for National Reconstruction) that implemented the first five-year plan, which was inaugurated in 1962. This military rule was soon replaced by the 3rd Republic with Park Chung-hee a former general as head of government; he ruled the country by authoritarian means. Park however has been credited as a turning point in developing the ROK economy by shifting goals to focus on export-orientated industrialization. Park was able to enforce his policies by declaring a state of emergency and tightening down on personal freedoms. In 1979, Park was assassinated by the KCIA director Kim Jaegyu. Kim believed that Park’s authoritarian rule was a threat to the long term development of Korea and its democracy. Park’s administration saw the establishment of POSCO, which is now the world’s second largest steel maker. Despite the unpopularity of his dictatorial rule, the economic growth during his years in office was unprecedented; it was during this time that another two 5 year plan had been implemented. The first 5 year plan under Park’s administration aimed to convert ROK into a heavy industry making nation competitive in the international marketplace. The second 5 year plan saw the government borrow heavily from foreign countries so it could direct its projects. The days of Park saw the passing of two new governments (4th and 5th republics of Korea) from the initial rule to the change in constitution which resulted in Authoritarian rule. After the assassination in 1979, another series of protests lead by students emerged. Another coup soon took place in December of that year and saw the establishment of the current government, the 6th Republic of South Korea.
Economic developments (1990-2000)
Due to the cold war and other political reasons, for a long period of time, PRC and ROK had only little indirect trade carried out through Colonial Hong Kong. In 1991, PRC and ROK both established trade and economic representative offices in Seoul and Beijing respectively. Bilateral trade between two states was only at a rough US$5 billion in 1992. It had increased to nearly US$60 billion by 2000.
China’s economy regained its momentum after the beginning of economic reforms established by Deng. China’s key task as stated by Deng was to create a “socialist market economy”. In 1993, economic expansion had been growing rapidly with the induction of more than 2000 special economic zones (SEZs), this brought in foreign capital and investment far beyond the state budget. The Chinese economy continued to grow at a fast pace in 1996, the GDP growth rate was roughly 9.5%. A policy named “Grasping the large and letting the small go” was produced as part of a wave of industrial reforms in 1996. The concept was adopted in 1997; it aimed to corporatize state owned enterprises and to downsize the state sector by relinquishing state control over small state-owned enterprises whilst maintaining state control over the larger enterprises.
Larger enterprises were also nurtured by the Korean government in the form of “Chaebols” which are business conglomerates; they have accounted for almost 100% of the South Korea economy since the 1960s and experienced rapid growth since the late 80s. The largest 3 conglomerates include Samsung Group, Hyundai KIA Automotive Group and LG Group. These conglomerates have facilitated the growth of the Korean economy; by the 1990s South Korea was one of the largest Newly Industrialized Countries (NICs).
In 1997, the Asian financial crisis showed the weaknesses in all financial systems in Asia. Korea was hit especially hard, of the 30 largest conglomerates, 11 had collapsed between 1997 and 1999. Under President Kim Dae-Jung, the government made several reforms to the economy and business strategies of these conglomerates. Instead of competing in every market and industry, conglomerates were pressured to focus on a core competency and a core business. Accounting regulations were tightened to limit the ability of these businesses to hide financial losses.
China’s economy was also hit by the Asian financial crisis though the damage was not as severe as those of South Korea. Unlike most other Asian nations at the time, most of China’s FDI were physical assets such as factories rather than securities which shielded the country from sudden capital flight. Whilst it was left relatively unharmed compared to the collapse of major conglomerates in South Korea, GDP growth rates had dramatically declined in 1998 and 1999. China saw the weaknesses in other economies and corrected them within its own economy such as having too many non-performing loans and relying too heavily on trade with the United States.
Current Economic Situation and Relations (2000-present)
PRC is both ROK’s largest export partner and import partner. 27% of exports go to the PRC including its SARs whilst 17.7% of imports are from the PRC. Even though China’s total GDP is the 3rd largest in the world it is still considered a developing nation as its average income and GDP per capita is still extremely low. In contrast Korea has the world’s 13th largest economy but is classified as a high income economy by the World Bank and an advanced economy by both the IMF and CIA. In 1992, only 265 investment projects in China were approved by the Bank of Korea. According to the Ministry of Commerce of China, the Chinese government approved 5625 FDI projects from Korea in 2004 with a total value of US$13.911 billion. By the end of 2004, the Chinese government altogether approved 32,753 Korean investment projects with a total contract value of US$50.56 billion.
The growth of the industrial sector contributed heavily to both nations’ GDP. In 1987 manufacturing industries accounted for approximately 30% of the GDP and 25% of employment. In 1990, the ROK government decided to focus on high-technology industries such as robotics, micro-electronics, fine chemistry, aerospace etc. Industry and construction contributes to 48% of China’s total GDP. Roughly 8% of the total manufacturing output in the world comes from the PRC. Major state industries are iron, steel, coal, machinery construction, armaments, textiles and light industrial products. These industries survived the reforms of Deng with little management change.
Both the PRC and ROK have succeeded in the expansion of their automotive industries. The Hyundai Kia Automotive Group was formed by merging ROK’s largest car company with the second largest. It is the third largest automaker in Asia and one of the top five automakers in the world as of 2008. PRC’s automobile industry has also experienced rapid development since 2000. In 2008, over 9 million vehicles were manufactured in China, surpassing the USA as the second largest automobile maker in the world. China also has the world’s largest automobile market which has meant numerous foreign firms have entered the market. Some of these enter the market as joint ventures with local firms. Hyundai entered into the market as a joint venture with the Beijing Automotive Industry.
Hyundai has raised its sales growth forecast for China this year from 22 percent to 36 percent as economic stimulus measures increase demand in china. Hyundai’s forecast in China was raised from 360,000 to 400,000 units compared to the previous year of 294,508 units. This target also does not include imported cars from ROK which is expected to be at 30,000 this year. The success of Hyundai in China in recent years can be contrasted with toughening conditions for General Motors who entered in 1997 and Volkswagen who arrived 21 years ago. Hyundai Elantra compact cars have increases sales by 156% from this time last year. As GM fails in its own domestic market it is struggling to compete on price against Hyundai in the Chinese market. Market capacity is forecasted to grow roughly 30% this year and Hyundai plans to invest $1.1 billion USD to triple its annual production capacity.
At present, roughly 18000 Korean firms are operating in the PRC. President Lee Myung-bak urged Korean and Chinese companies to expand investments in each other’s countries, proposing to turn the Yellow Sea between the two nations into an “inland sea”. President Lee expressed a wish to help Korean firms to be included in large inland development projects in the north eastern and western parts of China. Shanghai Motor also bought a controlling stake of 48.9% in Ssangyong, becoming the first Chinese firm to own a major stake in Korea.
In terms of bilateral trade between ROK and PRC, China has always had a trade deficit which has been growing every year. China’s exports are mainly products from labour intensive industries such as textiles. Where as Korean exports are mostly capital/technology-intensive products such as integrated circuit components, micro electronics, communication instruments etc. It products, heavy industries and chemical industries dominated Korea’s exports to China, these products accounted for 57% of total exports from Korea. These included computers, wireless communication apparatus, steel sheets, petrochemical products, semiconductors, automobile components. Whilst 40% of China’s exports took form of commodities, such as garments, coal, aluminium, steel sheeting, crude chemical materials, acoustic equipment etc. The main difference between the economies is that China and Korea are in different stages of economic development and have different competitive/comparative advantages. According to the economic history of various other nations, the transformation and development of a nations industry generally follow the same route:
Agricultural Light and Textile industry - Heavy and chemical industry - High Tech IT industry - Service industry
The structure and characteristics of Chinese export show that China is in a transition stage from light textile industry to heavy chemical industry, where as Korea is in a transition stage from heavy chemical industry to high tech IT industry. Korea seems to be one stage ahead of China; this fact makes cooperation between China and Korea complimentary rather than competitive.
Rapid growth in sales of Korean products in China will accelerate future prospects for Korean firms in the Chinese market. Samsung entered into the market in 1992 and it has achieved significant success in the past decade. The total sales revenue in China was US$9.7 billion in 2003, which is roughly 26% of its total sales worldwide. LG Chem’s export to China makes up 50% of its total export amount. In 2004, it earned a profit of US$120 million from its operations in China. As the Chinese economy develops, its market will become more open and its domestic market will expand. This will stimulate the development and growth of Korean enterprises whilst their advanced technology and managerial experiences will bring more vitality and dynamics to the Chinese marketplace.
In 2006, a Free Trade Agreement (FTA) is also being discussed by ROK and PRC. PRC’s Commerce and Industry Minister Bo Xilai met with his Korean counterpart Chung Sye-kyun to discuss issues such as the push for a FTA. Seoul however is treading carefully with the push for an FTA as it could mean a sudden surge in cheap agricultural products and light industry goods. Bo visited Korea 3 times as of 2006 and met not only with Chung but also the Trade Minister and other entrepreneurs during his visits. In contrast, Japan and ROK begun negotiations for a FTA in 2003 but negotiations came to a halt during 2006 when the Japanese Prime Minister Junichiro Koziumi was reported to visit Toyko’s Yasukuni Shrine regularly. This shrine honours Japan’s war dead including convicted war criminals who committed atrocities in Korea, China and other various Asian countries. Meanwhile, ROK and PRC have agreed to make efforts to double trade between the two states to US$200 billion per year by 2012.
There have been other indirect relations such as PRC and ROK’s interest and purchase of Australian iron ore. China has made strategic equity investments to secure Australian iron ore supplies. The Korean Trade Minister Kim Jong-Hoon expressed that his government had no concerns about China’s moves to secure supply.
Relations under current Economic Crisis
As the current crisis develops China is leveraging its position and trade surplus to achieve a new position in the world as a financial leader. Premier Wen Jiabao and other leaders of the party have blamed the West for the current economic crisis. Chinese officials are challenging the primacy of the dollar and warning other countries about the risks of using just the USD or EURO as their main reserve.
Much like the Asian Financial Crisis, Korea’s economy has been hit harder than the Chinese counterpart. The South Korean Won has been heavily depreciating against the USD. Unlike the crisis of 1997 which stemmed from domestic financial mismanagement, the current crisis stems from outside its borders. The shrinking of US and EU markets has heavily effects the export driven economy of ROK, this crisis has highlighted the need for its regional trade efforts. Even though the US and EU markets are driven into recession, Korean exports to China has expanded by almost 34% in the second quarter of 2008. China has been pressured to float its currency which will cut down its exports as a way of correcting the current global imbalance. However, the real solution is to increase domestic consumption so it does not need to heavily rely on export. China has been implementing economic stimulus to increase domestic demand. This includes RMB¥ 4 trillion to be invested into infrastructure and public welfare. Key areas including housing, transportation, environment, industry, income building, tax cuts and finance. These will not only help shield against the financial crisis but will increase consumption and demand as living standards increase, this is not only a good opportunity for Korea but also a lifeline out of the current financial turmoil. Korea has also proposed a joint fund of US$80 billion with China, Japan and ASEAN members to fight the current global economic crisis.
Future
As the Chinese and Korean economies develop well into the future and as the large Chinese population develops and matures into a well educated and consuming market, unlike the tainted relations between Korea/China and Japan, Korea will be in the perfect position to benefit from China’s economic developments with a history of good relations, geographic proximity to support and reinforce the relation between the nations. As both nations move out of the depressions and turmoils of the last century, both will look to each other for support economically and culturally.
South Korea’s Sunshine Policy and its ultimate and eventual goal of reuniting the ROK with the DPRK into a single Korea cannot be realised without China to provide a channel of dialogue as a friend of both sides of the peninsular. Though traditionally China was looked up to by Korea as a bigger brother, in this new world it resembles a relationship of two close friends who have been through hell together and on the road to recovery, both nations need each other and both have a lot to learn from each other.
