Semiconductor Technology Gap and the Collapse of the Middle Class: Diagnosing the Structural Crisis of the Korean Economy

The middle class, the backbone of the South Korean economy, is collapsing. Warnings have emerged that the collapse of the middle class goes beyond a simple issue of income inequality and could lead to a structural crisis that shakes the sustainability of the national economy within the next 5 to 10 years. In particular, the fact that the semiconductor industry, the core driver of the Korean economy, is facing intense pursuit from China has been identified as the background accelerating this crisis.

The Collapsing Economic Backbone: Can the Semiconductor Super-gap Be Maintained?

According to the economic diagnosis provided by Economics Master Gwak Su-jong, the biggest factor of instability in the current Korean economy is the weakening of the middle class. For the economy to strengthen its foundation and increase income, the proportion of the middle class, which supports economic stability, must maintain a level of 60% and achieve growth that exceeds the potential growth rate; however, the analysis suggests that the current trend is a vulnerable structure that could collapse at any time because this 'backbone' is not solid. Gwak emphasized the fundamental strength of the economy, stating, "Before saying whether the economy is good or bad, one must first look at indicators such as changes in the labor market, employment changes, and jobless claims."

At the root of this structural crisis lies the uncertainty of the semiconductor industry. Gwak posed a fundamental question: "Will Samsung Electronics and SK hynix be able to maintain their dominance while competing with Chinese companies such as CXMT, YMTC, Huawei, and Xiaomi five or ten years from now?" This is because China is making intense moves to narrow the technology gap, such as releasing prototypes at the HBM3E level in the GPU (Graphics Processing Unit) field by injecting massive capital, and attempting self-development even without the lithography equipment from the Netherlands' ASML. In particular, China is accelerating its technological independence by creating GPU prototypes called A1000, which is an intermediate stage comparable to the H200.

Gwak emphasized that this is not mere pessimism but a 'diagnosis to prepare for the future.' He argued that because there is a high possibility that semiconductors will be caught up to by China, it will be difficult for the economy to hold out for 5 or 10 years, and urged that rather than being complacent with the current semiconductor boom, one must face the essential threat factors to industrial competitiveness. He made it clear that his perspective is not criticism or pessimism, but a concept of preparing for the future in advance.

China's Strategic Moves and South Korea's Lack of 'Strategic Flexibility'

China's actions are also acting as a variable for the Korean economy. Gwak analyzed that by mentioning the appointment of Pan Gongsheng as the Governor of the People's Bank of China in 2023, China is already showing strategic moves to prepare for foreign exchange crises by putting exchange rate experts at the forefront. This suggests that China is already responding by including changes in the global trade environment, such as tariff wars following the US presidential election, in its scenarios. Gwak explained, "It appears that China views the 2024 US election and the re-election of President Trump in 2025 as possible scenarios, and has appointed exchange rate experts to respond to things like the imposition of 100% tariffs."

To fill the fiscal deficit caused by the collapse of a $13 trillion real estate bubble, the Chinese government is releasing massive amounts of money and pouring subsidies into advanced industries such as electric vehicles, AI, and humanoids. Gwak pointed out that "Although China is a structure where market economy mechanisms are difficult to function properly, it is moving very aggressively through monetary and fiscal policies," and noted that the ripple effects of such Chinese responses on the Korean economy must be considered. In particular, he urged close monitoring of the economic situation inside China, mentioning that the youth unemployment rate in China has reached 18.9%, with perceived indicators approaching 40%.

In this process, questions were also raised regarding the 'strategic flexibility' of the Korean economy. Gwak showed a skeptical view regarding whether the current situation, where South Korea's base interest rate remains at the 3.5~3.75% level, provides sufficient room to respond to the rapidly changing global financial environment and exchange rate volatility in the future. He cited complex situations, such as the issuance of assets (ADR) by companies, which affects national exchange rate policy. He pointed out a structure where the financial activities of individual companies can affect the country's import prices and exchange rate policy, citing the case where the exchange rate fell from the mid-1,500 won range to the mid-1,300 won range after SK hynix issued $26 billion worth of ADRs on the US Nasdaq.

The Interest Rate Hike Dilemma and the Theory of Speed Adjustment in the AI Industry

The dilemma surrounding interest rate policy is also deep. While Gwak personally holds the position that interest rates should have been raised to the 5% level, he acknowledged that raising interest rates is not easy when considering the household debt problem (of 2,000 trillion won) of small business owners and the self-employed. He mentioned the difficulty of policy decisions, saying, "There is no right answer as to whether one should cut out the rotting wound of the economy or watch it without surgery." He also mentioned that the direction of the market is changing rapidly, noting that FedWatch, which previously saw a 70% possibility of an interest rate hike in October due to variables such as the continuation of the Iran war, has adjusted the probability of not hiking to 67%.

Regarding semiconductor demand, he raised the possibility of a 'speed adjustment' in the AI industry. He stated that recent discussions regarding data center topography issues and AI regulation and supervision reflect a trend to slow down the speed of technological development. The US government is also showing a movement to regulate the speed race of the AI industry by showing an attitude of leaving management to companies while still providing support. This aligns with the intention of the US to buy time to build a semiconductor production base within its own country, and it could act as pressure for Korean companies like Samsung Electronics and SK hynix to 'transfer production facilities to the US.' This is because the US tends to prioritize national interests regardless of whether it is the Democratic Party or the Republican Party.

Ultimately, in a market situation where uncertainty is increasing, investors are at a point where they must re-examine response strategies according to the characteristics of each asset, such as cash, precious metals like gold and silver, and stocks (value stocks and growth stocks).

Source: original video (YouTube)