Asia Economy

Korea Inc getting squeezed by China: FinMin

Written by Ansuya Harjani; Reported by Julia Chatterley
Jung Yeon-Je | AFP | Getty Images

South Korean companies feel the pain from the wave of low-cost competition out of China, said Finance Minister Choi Kyung-hwan, acknowledging that business leaders have their work cut out.

"Korean companies are being challenged by Chinese companies, especially in areas where Korea used to have much strength," Choi told CNBC.

"They have to try even harder," he said, adding that research and development is front and center for Korean corporates now.

The government, meantime, is looking at ways to improve the operating environment for businesses.

"One way we are doing that is by restructuring the labor market," he said. The Korean labor market has been criticized for its lack of flexibility.

Does South Korea's economy need more stimulus?

South Korean tech heavyweight Samsung Electronics embodies the struggles faced by parts of the country's corporate sector, say analysts. With the quality of "made in China" improving at a faster pace than many expected, low-cost handset manufacturers such as Xiaomi are posing a serious threat to Samsung's lead in the consumer electronics smartphone market.

On top of competition out of the mainland, Korean businesses are grappling with a weaker yen, which has given their Japanese rivals a pricing edge.

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"It is true that different currencies will have an impact on the Korea's export capabilities and competitiveness. We have seen quantitative easing with Japan resulting in a lower yen and that of course is a factor that is influencing our competitiveness in the world market," Choi said.

"However, Korea is of the position that foreign exchange rates should be determined by the market and we let the market decide how the rates should be," he added.

Another round of stimulus?

Discussing the health of the broader economy, Choi said there is some evidence of a recovery, however he is not ruling out further stimulus in the second half of the year if needed.

Last July, the government unleashed a $40 billion stimulus package to revive the country's flagging economy.

"The Korean economy is growing at about mid-3 percent and compared to many of the OECD countries, this is actually rather a solid figure, however, I believe there's much room for further growth," he said.

"In order for that to occur, we are not only looking at the export market but also the domestic market," he said.

Read MoreBank of Korea joins the global easing spree

Earlier this month, Bank of Korea lowered its full-year gross domestic product growth forecast to 3.1 percent from 3.4 percent, calling for the government to take on fiscal measures to stimulate the economy.

Doing its part, the central bank in March cut its policy interest rate by 25 basis points to a record low 1.75 percent.