Rising Inflationary Pressure May Cause Global Recession

China has been playing the role of a global factory over the past several years, supplying low-priced products to world markets. The United States, European countries, Japan and other economies have enjoyed a deflationary benefit thanks to cheap Chinese exports, and South Korea is no exception. China has also helped the world see robust growth driven by the rapidly growing economy.

Despite all the bright aspects of the deflationary benefit, China seems to be opening its Pandora's box. The neighboring country has devoured energy, steel and other raw materials to churn out products by exploiting cheap labor. The glutton has prompted a surge in raw materials prices and even triggered an acute shortage of them. This negative side has so far been offset by the bigger benefit of low-priced goods for consumers around the globe. In short, China has helped to keep prices low in many countries.

China now faces serious side effects of its rapid growth and fast industrial development. One of gravest worries is mounting inflationary pressure. The country's inflation rate rebounded to an 11-year high of 6.5 percent last month on food price hikes. Its central bank had planned to keep the rate under 3 percent this year. But it is expected to surge to an annual 4.5 percent. Producer prices have also risen 3.2 percent. Property prices have surged and the stock market has been overheated. Wages have also increased considerably. In this situation, Chinese products will no longer be cheap, possibly creating a worldwide inflationary spiral that might hit the global economy hard.

Critics warn of the overheating Chinese economy, cautiously predicting that a bubble might burst if Beijing fails to take proper measures. In the case of a hard landing, the repercussions could reverberate throughout the world and cause a global recession. Recognizing this risk, the Chinese central bank has raised interest rates four times this year. It is forecast to raise them again in a bid to bring soaring prices under control and cool off the economy.

But no one can be sure that such a measure will produce successful results and lead to a soft landing. China also faces international pressure to let its currency, the yuan, become stronger against the U.S. dollar and other major currencies. A higher yuan would make Chinese exports more expensive on overseas markets. What's more worrisome is that the Chinese government is not likely to take radical action to fix the problems until the Beijing Olympic Games next summer.

A brewing shock from China is feared to pose a serious threat to South Korea whose economy is increasingly dependent on the Chinese economy. Korea-China trade is predicted to grow to $150 billion this year and to exceed $200 billion in 2012. China became South Korea's largest trading partner in 2004, beating out the U.S. and Japan. The country also emerged as the largest destination for Korean products in 2006, while South Korea was the fourth largest export market for Chinese goods.

We hope China will take appropriate and timely steps to fix its economic ills to maintain sustainable growth. South Korean policymakers are also required to work out measures to cope with a potential shock from the neighboring country.