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Announcement:

Moody's: Korea-China FTA will have no medium-term impact on rated Korean corporates

 The document has been translated in other languages

13 Nov 2014

Hong Kong, November 13, 2014 -- Moody's Investors Service says that the free trade agreement (FTA) between Korea (Aa3 stable) and China (Aa3 stable), if implemented, will have no meaningful near- to medium-term impact on rated Korean corporates. This is because a large proportion of China's custom duties will either remain in place or gradually phase out over the next 10 -- 20 years under the proposed agreement.

However, the FTA could be positive for key Korean exporters over the long term, as it will offer enhanced access to the Chinese market and will gradually reduce custom duties for some products.

On 10 November 2014, the leaders of the two nations said that they reached an effective conclusion towards an FTA between the two nations. According to Korea's Ministry of Trade, Industry and Energy, the agreement will immediately remove custom duties on USD8.7 billion worth of exported goods. However, custom duties on another USD45.8 billion worth of exported goods will be removed only 10 years after implementation of the FTA.

Although China is by far the largest export market for many Korean exporters, the FTA will not have any meaningful impact on rated Korean corporates' credit profile over at least the next 3-5 years.

This is because (1) it will take at least 1-2 years for the FTA to become effective; and (2) of the narrow scope of the products for which custom duties will either be immediately or gradually removed.

For instance, high-grade steel products are key export products for Korean steelmakers such as POSCO (Baa2 stable). But media reports indicate that China will lift custom duties for only a portion of high-grade steel products over the next 10 years, effectively limiting the positive effects for the steelmakers.

At the same time, as Korea does not impose any custom duties on steel products, there will be no negative impact on Korea's steel imports from China.

Similarly, Moody's expects minimal impact from the FTA for Korean refiners and chemical companies, such as SK Innovation Co Ltd (Baa2 negative) and SK Global Chemical Co Ltd (Baa2 negative). Custom duties on the majority of their key export products -- such as diesel and paraxylene -- are likely to remain intact over an extended period.

Furthermore, the impact of the FTA will be largely neutral to Korean automakers such as Hyundai Motor Company (Baa1 stable) and Kia Motors Corp (Baa1 stable), because custom duties would remain largely unchanged and because these companies have already established significant production bases in China.

On the other hand, the transportation sector -- including airline and shipping companies -- will likely benefit from the FTA, as trading volumes between the two nations are expected to increase.

The FTA would also ensure enhanced protection to Korean companies investing in China, which would improve business stability for these companies.

In addition, the FTA should allow better access for Korean corporates to the Chinese market. This will allow these companies competitive advantages over peers in countries such as Japan (Aa3 stable) and the US (Aaa stable), particularly in the areas of steel, chemicals, autos and electronic goods.

Two-way trade between the two nations reached USD229 billion in 2013, more than that with Korea's next two largest trading partners, the US and EU.

The FTA is currently a broad outline and the Korean government expects the agreement to be initialed by the end of this year, subject to further negotiation between the two nations.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Wan Hee Yoo
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Korea-China FTA will have no medium-term impact on rated Korean corporates
No Related Data.
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