China's shift into monetary tightening is feared to hurt South Korea's exports and put upward pressure on Korea to raise the key rate in the short term, a report said Tuesday.
China's central bank unexpectedly hiked interest rates on Christmas Day last year for the second time in about two months to curb growing inflationary pressure. The move came on the heels of the Chinese government's pledge to shift to a "prudent" monetary policy stance in 2011 from the previous relatively loose one.
According to the report by the state-run Korea Development Bank (KDB), China's tightening bias is expected to have negative impacts on South Korea by curtailing Korea's exports to the world's fastest growing economy and raising calls for a rate increase by Korea.
"China's inflation is expected to exert upward pressure on Korea's consumer prices by jacking up import prices. South Korea is projected to be under pressure for raising the rate," the report said.
China's potential rate increase, spurred by higher inflation, is likely to undercut its economic growth, thereby reducing demand for Korean products. China is South Korea's biggest trading partner.
Concerns about impacts from China's inflation are echoed by Bank of Korea Gov. Kim Choong-soo, who earlier warned against growing inflation risks stemming from China, as they could put upward pressure on local consumer prices.
But KDB said over the long haul, China's monetary tightening is expected to lay the groundwork for the country to pull off sustainable growth by easing risks of asset bubbles and inflation. KDB said China's moves will also help South Korea increase trade and investment as well as boost economic cooperation with the world's second-largest economy in the long term.