SEOUL Recent moves by China to restrain South Korean businesses, seen as retaliation for the deployment of a U.S. anti-missile system, will be negative for South Korea's economy, the head of the central bank said on Thursday.
"Our exchanges with China and South Korean companies doing business there have recently experienced significant difficulties and this will have a negative effect on the economy," Bank of Korea Governor Lee Ju-yeol said during a luncheon meeting with reporters.
"China takes in a high portion of our exports and we will be observing the situation closely."
China is South Korea's largest trading partner and the dispute over the Terminal High Altitude Area Defense (THAAD) anti-missile system has resulted in a sharp decline in Chinese tourists to the country.
Chinese authorities have also closed nearly two dozen retail stores of South Korea's Lotte Group amid the diplomatic standoff.
The impact of business disruptions with China may be reflected in part in the BOK's next economic forecasts scheduled to be announced in April.
South Korea and the United States say the sole purpose of the THAAD system is to guard against missile launches from North Korea, but China says that its powerful radar could penetrate into its territory.
Beijing has never explicitly linked the restrictions to the THAAD deployment.
Lee said a surge in global trade protectionism could also hold back a recovery in South Korea's export-reliant economy.
Financial leaders of the world's biggest economies dropped a pledge last weekend to keep global trade free and open, acquiescing to an increasingly protectionist United States after a two-day G20 meeting failed to yield a compromise.
Lee said the move was "enough" to raise concerns over the possibility of greater protectionism.
"If protectionism grows at this time when our economy is fragile with consumption weak, it will be a factor holding back our economic recovery," Lee said.
The governor also addressed recent pledges made by potential South Korean presidential candidates to reduce household debt, warning that too forcible a move would "lend a shock" to the economy.
Lee said it would be wise to steer policy towards slowing the pace at which household debt grows.
South Korea's household credit stood at 1,344.3 trillion won ($1.20 trillion) as of end-2016. It surged at the fastest pace in over a decade in the fourth quarter.
South Korea will hold a presidential election on May 9 after leader Park Geun-hye was thrown out of her seat on March 10 by the Constitutional Court for an influence-peddling scandal.
On the current state of the economy, Lee said capital investment is improving in line with the global economic recovery, while financial markets have shown no unusual activity after the U.S. Federal Reserve raised interest rates last week.
(Reporting by Christine Kim; Editing by Kim Coghill)