APEC meeting in Beijing may see warmer regional ties

China’s economic growth is showing signs of flagging, but that has not deterred South Korean companies from stepping up their interest in the world’s second largest economy, with investments up by a third this year.

The big loser in this growing closeness is Japan, as both Korea and China have issues with Tokyo over territorial disputes and Japan's wartime history. But this month's Asia-Pacific Economic Co-operation (Apec) forum in the Chinese capital might prove to be a platform for better regional relations.

South Korea's foreign direct investment (FDI) into China rose 33 per cent to $3.23 billion in the first nine months of this year. South Korea is one of the few developed countries that runs a trade surplus with China, its biggest export market (Ireland, incidentally, is another country with a trade surplus with China).

The backdrop to Seoul's renewed investment has been an improvement in diplomatic ties, largely because of what appears to be China's exasperation with Seoul's bitter rivals in North Korea.

Samsung is building production facilities in China, as is the carmaker Kia – manufacturing makes up 90 per cent of total South Korean FDI to China.

Carmaker Hyundai is also stepping up investment as it needs to deal with increased competition in China, where it is fourth in sales among foreign brands. Hyundai's US sales rose 3.1 per cent in the last quarter, compared to 8 per cent in the industry as a whole.

But the retail sector is also growing strongly – Chinese kids love Korean pop music and fashion, and the wholesale and retail sector grew more than 55 per cent last year. Korean entertainment companies are also signing joint ventures with Chinese firms after the signing of a film co-production treaty in which jointly made filmes are treated as Chinese and do not have to apply to come under a quota of foreign films allowed into China.

A senior executive from one of the giant chaebols, the industrial conglomerates that have a hand in so much economic activity in South Korea, told Asia Briefing recently that China was attractive because of scale but it was difficult to get money out of there.

“Samsung has done well there, but only because of the phone handsets. When we put in other products, such as flat-screen TVs, there is a Chinese version out very quickly, so it remains a difficult market,” said the executive, who asked to remain anonymous.

Free trade deal

Some of these complicating factors will hopefully be eased by a pending free trade deal, heavily flagged during a meeting by China’s president, Xi Jinping, with South Korean president Park Geun-hye.

The two have met five times since both took office last year and they hold another bilateral summit at the Apec meeting. The deal could be done by the end of the year.

The diplomatic angle is important as it is in sharp contrast with Japan, which has been cutting its exposure to China because of ongoing tensions over the South China Sea. Both China and Japan claim an archipelago, known as the Senkakus in Japan, to whom they officially belong, and the Diaoyus in China, which contests Japan’s ownership.

So far this year, FDI from Japan is down 43 per cent.

Japanese prime minister Shinzo Abe is hopeful that Apec could provide a forum for the first summit talks between himself, Xi and Park, with a view to resolving these differences, but so far both the Chinese and the Korean leaders have refused to meet one-on-one with Abe, citing the territorial issues and the way Japan deals with its wartime history.

Longer term, there is a belief that ties between Beijing, Seoul and Tokyo will improve.

"If the world's second- and third-largest economies talk, the meeting will be a dynamic one," chief cabinet secretary Yoshihide Suga told a news conference last month.