(C) Concepto

While perhaps not to the extent of the colloquialism “earning like a dog to spend like a minister,” it is hard to find anyone who dislikes money. Currency primarily serves as a means of storing and exchanging value, and its worth is generally assessed by its purchasing power. Purchasing power refers to the ability to acquire goods of a certain quality and quantity, accounting for fluctuations in prices. Generally, as prices tend to rise over time, a fixed amount of currency cannot maintain its purchasing power; interest is the compensation for this loss. Of course, interest on loans often includes a risk premium for the potential loss of principal. When deposit rates rise, capital tends to shift toward savings rather than physical assets like stocks or real estate, and an increase in loan rates leads to a decrease in investment through borrowing.

While some individuals who lack easy access to financial institutions suffer at the hands of loan sharks with exorbitant rates, the official benchmark interest rate is based on the "call rate," used for ultra-short-term lending between financial institutions. The call rate fluctuates based on the reserve status of the banking sector, the issuance and redemption of bonds, short-term capital demand from corporations, and the management patterns of financial institutions. Although it is a rate applied between financial institutions, it is effectively controlled by the Bank of Korea. The Monetary Policy Board, the governing body of the Bank of Korea, holds regular meetings to set the direction of monetary policy—absorbing market liquidity by raising the call rate if there is a risk of inflation due to overheating, or lowering it to stimulate the economy if it appears too contracted.

On October 29, China raised its benchmark one-year lending rate by 0.27 percentage points, from 5.31% to 5.58%. The one-year deposit rate was also raised by 0.27 percentage points, from 1.98% to 2.25%. It is reported that they have, in principle, abolished the ceiling on lending rates for all financial institutions except for local credit unions. China experienced 9.9% economic growth in 2003 and is maintaining growth in the 9% range this year. The consumer price inflation rate rose from 3.2% in 2003 to 5.3% in the third quarter of this year. As of the end of September this year, real estate prices increased by 13.4% and real estate investment volume by 28.3% compared to the previous year. The world’s second-largest oil consumer after the United States is recognizing private property and adapting to capitalism and a market economy.

Among South Korea's export partners, China ranks first (18.1%), surpassing the United States (17.6%). In 2003, the trade surplus with China accounted for 88% of the total trade surplus, making it a profitable venture; however, the Korean economy has now entered a difficult path. This is because the KRW/USD exchange rate has recently reached the 1,110 range, and China’s interest rate hike will slow down its economy, thereby reducing Korea’s trade surplus with China. The cyclical component of the coincident composite index, which indicates the current phase of the economy, has been heading straight downhill from 100.0 in April to 96.9 as of September. If this index falls for more than six consecutive months, the economy is considered to have entered a downturn, and even superficially, there seems to be no catalyst for improvement. The year-on-year growth of the leading composite index, which predicts future economic turning points, also fell to 2.3% as of the end of September, down from 2.4% in August, marking its sixth consecutive month of decline.

The rapid growth in the early stages of China's development may cause serious harm due to imbalances between industries, classes, and regions. However, China is building a solid foundation by acquiring original technologies and actively investing in their development. To manage the pace appropriately, they will likely adjust the speed by monitoring trends following this first-stage rate hike. China still has a long way to go before adopting a fully floating exchange rate system for international trust, but watching China brake its own high-speed growth while the Korean economy rushes downhill, I cannot help but feel a sense of helplessness.

[Copyright (c) Global Economic Times. All Rights Reserved.]