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South Korea’s economic slump a bad sign for Asian economies dependent on exports to China

South Korea’s economy shrank in the first quarter of 2019. That is a headache for policymakers in Seoul, but it might also have a wider significance. While Hong Kong itself might be sheltered to some degree, there may be troubled times ahead for other open economies in Asia whose fortunes are closely tied to China.

With China’s policymakers now seemingly more inclined, given improved Chinese economic data in the first quarter, to eschew stimulus and refocus on structural reform, South Korea and other open economies in Asia may find that China’s appetite for their goods continues to be somewhat subdued. Additionally, as any eventual China-US trade deal will incorporate Chinese commitments to buy more US manufactured goods, other countries exporting to China may find that their own market shares are more lastingly eroded.

Many of those same open economies in Asia, most of which are dependent on US dollar-denominated energy imports to power their manufacturing base, will also encounter problems arising from the combination of a stronger US dollar and a higher oil price.

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