S KOREA BOOST FOR RECOVERY Rising Chinese demand helped drive South Korea's economy to its fastest growth in seven years in the third quarter, underscoring how Asia is leading the global economy and trade out of the worldwide downturn. Asia's fifth-largest economy grew 2.9 per cent from the previous quarter as South Korean exporters benefited from rising Chinese demand. Last week, China said that its economy, which has regained speed on the back of massive government stimulus spending, expanded 8.9 per cent in the third quarter from a year ago. The South Korean recovery underlines how both demand and production from Asian countries has assumed an increasing role in global growth over the past few months. A widely watched indicator of trade from the Dutch Bureau for Economic Policy Analysis, released last week, showed that import demand from emerging market Asian countries rose 6.6 per cent in the three months to August, sucking in imports from the rich world as well as from other regional economies. Li Keqiang, the Chinese vice premier in charge of the economy, yesterday said that China's economy was in better shape than the government had forecast earlier this year. In relatively upbeat remarks that contrasted with recent comments by senior Chinese officials, Mr Li said that the recovery had been “consolidated”. While Mr Li stressed continuity in fiscal and monetary policy, his language seemed to pave the way for a reduction in economic stimulus measures. Among Asian countries, South Korea and India are seen as leading regional candidates to follow Australia's lead in hiking interest rates in coming months. While the Reserve Bank of India is not expected to raise rates when it meets today, it warned yesterday that “inflationary pressures have started to emerge”. Lee Seong-tae, governor of the Bank of Korea which will review rates on November 12, said last week keeping rates at a record low level for too long would hurt the economy, partly because of the levels of household debt in South Korea. The South Korean economy – the world's fifteenth largest – grew 0.6 per cent in the third quarter compared with the same period last year. Kim Myung-kee, a senior central bank official, said that fourth quarter growth would “easily go beyond five per cent” if current momentum continues. Leading exporters such as Hyundai Motor and Samsung Electronics have reported strong earnings growth. South Korean exports to China in September, for example, rose 4 per cent from a year earlier, the first annual rise in nine months. Mr Kim and other South Korean officials said that the economy could post flat or positive growth for the year, a significant improvement over the last official forecast of a 1.5 per cent contraction. South Korea is no longer the underdog When Kim Yu-na, South Korea’s figure skating sensation, takes to the Vancouver ice for her final programme this week, a nation’s pride will be riding on her 19-year-old shoulders. The near-hysteria back home surrounding her efforts to win an Olympic gold is all the more intense because her closest rival, Mao Asada, is from Japan, the old colonial enemy. In a nation used to seeing itself as an underdog, overshadowed by neighbouring China and Japan and all-but ignored by the rest of the world, sporting victory in an international arena takes on a supercharged significance. But South Korea’s status as an underdog is wearing thin. Its economy is practically as big as India’s even with a population less than one-twentieth the size. It exports more goods than the UK, a statistic admittedly more surprising to those who are aware that Britain still makes things. Samsung, not long ago considered a poor-man’s Sony, overhauled Hewlett-Packard last year to become the world’s biggest technology company by sales. This year, it should make more money than the top 15 Japanese electronics groups combined. South Korea has had a good crisis. While most other countries fell into recession or staved off collapse by putting themselves in hock, it is already back to robust growth. After treading water in 2009, the economy is expected to expand this year by 4.7 per cent, with a budget deficit of just 2 per cent of output, positively parsimonious in these Keynesian times. Urbanised, sophisticated, wired-up and with a per capita income in purchasing-power terms of some $28,000 – only $5,000 behind arch-rival Japan – South Korea is on the verge of long-cherished rich-country status. It even makes Asia’s most popular soap operas. Its economy has fared better than anyone dared imagine 18 months ago, when many economists were gloomily predicting a banking crisis. It never happened. Seoul acted swiftly, setting up a $15bn bank recapitalisation fund and helping to stabilise its currency by arranging $90bn in swap guarantees with the US, Japan and China. Diplomats boast they played the latter two off against each other to extract maximum funds. The government also implemented a well-targeted fiscal stimulus, focused on job creation and greening the economy. Several companies managed to upgrade their technological prowess even as the recession bit. A consortium led by state-run Korea Electric Power Corp, for example, beat US, French and Japanese rivals to a $20bn nuclear power contract in the United Arab Emirates. Seoul predicts it will bag $400bn in nuclear reactor sales over the next 20 years. Meanwhile, carmaker Hyundai has warmed its corporate hands on Detroit’s bonfire. Now the world’s fastest-growing auto-manufacturer, it has increased US market share from 3.7 per cent to 4.4 per cent in just 12 months. Toyota’s problems will only add to its momentum: it is one of the companies offering a $1,000 discount for a Toyota trade-in. Manufacturing exports overall have come back faster than almost anyone expected. Korean companies are big suppliers of equipment and materials needed for China’s stimulus-fuelled building extravaganza. Its cars, DVD recorders and other electronic goodies are in the right price range to win market share from stingier consumers. Exporters have been helped by their high exposure to emerging markets, which make up 70 per cent of demand for Korean goods. Manufacturers have further benefited from a sharp currency realignment that has seen the yen strengthen and, until recently, the won depreciate. “Since the crisis, things have flipped decisively in South Korea’s favour,” says Kwon Goo-hoon, executive director at Goldman Sachs in Seoul. The successes of corporate Korea are being matched by a new diplomatic swagger. Washington’s relations with Japan are rockier than normal because of disagreements over military bases. US-Sino ties are being tested by disputes over arms sales to Taiwan and cyber-security. That leaves South Korea as Washington’s new best friend in the region, a factor that has helped bolster its credentials as this year’s president of the Group of 20. South Korea, of course, faces enormous challenges. Its success is too dependent on a clutch of huge conglomerates such as Samsung. These companies still need to prove they are world-class innovators. The service sector is under-developed. The labour market is too inflexible for an economy seeking rapidly to redeploy resources to higher-value industries. Korea’s ride on China’s back could yet prove a liability if its giant neighbour stumbles. It also has one of the world’s most rapidly ageing societies. Unless it can increase productivity, its shrinking labour force holds out the unappetising prospect of producing Japanese-type growth levels. Of course, many of these problems – like those of Japan itself – are products of success. An economy that in the 1960s had a per capita income on a par with sub-Saharan Africa is now snapping at the heels of Britain and France. Indeed, South Korea has come too far to hide behind its underdog status. Of course it would be nice if Ms Kim, who scored a world record for her short programme on Wednesday, claimed a gold medal this week. But even if she falls flat on her face, South Korea has little to be ashamed of.