March 3, 2017 / 9:11 AM / 6 months ago

China hints at trade war strategy in South Korea standoff

FILE PHOTO - The logo of Lotte duty free shop is seen at its main shop in Seoul, South Korea, December 13, 2016.Kim Hong-Ji/File Photo

SHANGHAI (Reuters) - South Korean firms are being squeezed in China, in suspected retaliation for Seoul's deployment of a U.S. missile defense system, highlighting the tools China can deploy to hit back at the corporate interests of trade partners it disagrees with.

The chill facing Korea Inc, from cosmetics and supermarket chains to autos and tourism, points to a potential risk for American companies, amid a more confrontational stance taken by new U.S. President Donald Trump

In China, state media and grassroots political groups have led angry calls to boycott popular Korean products. Photos on social media and local news websites showed crowds vandalizing a Hyundai Motor Co (005380.KS) car, and some Chinese tourism firms moved to cancel Korean tours.

Beijing is furious over a joint plan by South Korea and the United States to set up the Terminal High Altitude Area Defence (THAAD) missile system in South Korea. Seoul and Washington say it will defend against nuclear-armed North Korean missiles. But Beijing says its far-reaching radar is targeted at China.

The furor echoes protests in 2012 against Japanese firms during a row with Tokyo over disputed islands in the East China Sea. The dispute flared on Monday when Lotte approved a land-swap deal that moved the THAAD system closer to deployment.

On Thursday, Lotte Duty Free, an affiliate of Korean conglomerate Lotte Group, said it had been the target of a suspected Chinese cyber attack.

"What's happening to Korean companies now is a pretty good playbook for what might happen to U.S. firms over the next year," said Andrew Gilholm, director of analysis for China and North Asia at risk consultancy Control Risks.

"Rather than the big dramatic trade war, everything goes to hell scenario under Trump, it's probably more likely to be manifested as regulatory harassment of companies - one of the lower intensity tools for China."

Korean stocks plunged on Friday, hitting cosmetics giant Amorepacific Corp (090430.KS), carmaker Hyundai, and airlines Jeju Air Co Ltd (089590.KS), Korean Air Lines Co Ltd (003490.KS) and Asiana Airlines Inc (020560.KS).

POLITICAL PRESSURE

Some companies hinted at feeling political pressure to loosen or cut ties with South Korea. Korean media reported China had ordered tour operators in Beijing to stop selling trips to the country.

Three major Chinese tour operators Reuters spoke to, including China Youth Travel Service (600138.SS), said they were still offering Korean tours. A customer service worker at Tuniu Corp (TOUR.O), however, said the firm had stopped providing tours to Korea, citing the THAAD controversy. Tuniu did not respond to requests for comment.

Lotte also said searches for its products had been disrupted on major e-commerce platform JD.com Inc (JD.O), though it did not directly say this was due to diplomatic tensions. JD.com declined to comment.

A barbed-wire fence is set up around a golf course owned by Lotte, where the U.S. Terminal High Altitude Area Defense (THAAD) system will be deployed, in Seongju, South Korea, March 1, 2017. Kim Joon-beom/Yonhap via REUTERS

The CEO of Chinese retailer Jumei.com posted on his official microblog that his firm would no longer sell Lotte products. The firm did not respond to Reuters requests for comment.

"Some retailers have removed Lotte sales channels over the last week as a result of political pressure," said a senior China-based retail industry executive, asking not to be named because of the sensitivity of the issues.

The Communist Party Youth League at central and local levels also fanned the flames online, calling for consumers not to buy products including cars, cosmetics and electronics.

"We say 'no' to Lotte!" the national-level Communist Youth League wrote in a post on its official microblog page.

'IT'S BEING COORDINATED'

The consumer backlash followed. The number of posts mentioning Lotte's Chinese name spiked to nearly 300,000 on Thursday from a normal level of a few thousand.

Photos posted on Chinese social media showed a large group of people surrounding a smashed up Hyundai car covered with black graffiti, prompting alarm over a repeat of issues that have hit faced Japanese carmakers. Other posts circulated online called for a blanket ban on all Korean tours.

China's tourism administration posted a statement about South Korean "travel tips" on Friday, reminding Chinese holiday-makers "to soberly understand the risks of traveling abroad and carefully choose their travel destinations."

The administration did not comment on any travel ban.

The normally hawkish state-run tabloid Global Times even struck a note of caution on Friday, warning vandalism of Korean products "won't win the support of mainstream public opinion".

However, Gilholm added the wide spectrum of measures taken against South Korea was unusually aggressive and authorities - though staying officially on the sidelines - played a role.

"For it to happen nationwide in such a short space of time it's clearly been coordinated. You don't see that being announced or admitted, but it's being coordinated," he said.

The Global Times warned last November the United States could face such a coordinated campaign. If Donald Trump triggered a trade war with China, Beijing would then target firms from Boeing (BA.N) to Apple APPL.O in a "tit-for-tat" approach.

"If Trump wrecks Sino-U.S. trade, a number of U.S. industries will be impaired," it said in an editorial.

Additional reporting by Cate Cadell and Xu Muyu in BEIJING, SHANGHAI newsroom. Editing by Bill Tarrant.

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