What are the government's stock market stabilizing measures?

The government will not just sit back and watch as investors lose their money.

This is the message that Finance and Economy Minister Jin Nyum sent to the nation Wednesday when he unveiled a package of measures aimed at stabilizing the stock market. He said that the government will come up with further measures to strengthen the constitution of the nation's capital market system.

Insurance companies should act as institutional investors:

The gist of Wednesday's package is to urge institutional investors like insurance companies to involve themselves in the stock market more aggressively. Funds exclusively for pensions and other government-managing funds will begin to operate in the market from Oct. 24 with 500 billion won entrusted by the Ministry of Information and Communication. The government did the right thing when it eased the regulations on asset management of life insurance companies. With a combined asset value of 111 trillion won, the nation's life insurance companies are investing only 9 trillion won, or 8.1 percent of their assets, in the stock market. They are making the majority of their investments in properties and loans with 41.5 percent and 33.3 percent, respectively. The government measure is intended to turn these investments to stock portfolios.

The Finance and Economy Ministry increased the ceiling of a company's investment in another company in the same business area from 10 percent of their issued stocks to 15 percent, and from 5 percent to 15 percent in the case that the investment subject belongs to the same parent group. The measure was designed to allow insurance companies to buy blue chip shares as much as they wish. But the government decided to keep the 5-percent ceiling for a company's bond investment in another company in the same business area. It also raised the limit of stock ownership from 30 percent of the total asset value to 40 percent.

Companies will be pressured to buy back their own shares:

The message has been delivered to listed firms to buy back their own stocks. Companies will also be allowed to set aside 30 percent of the acquisition costs of stock buybacks in loss reserves, which are exempted from corporate taxes. Companies will have the benefit for stocks purchased this year.

Officials explained that the measure is designed to force companies to share the responsibility for drops in their stock prices and to manage their stock prices. They said that companies will be recommended to purchase their own stocks through the council of listed companies.

Analysis of policy effectiveness:

The measures are expected to improve the imbalance of supply and demand in the long-term. But in order to raise funds for stock investments, insurance companies should sell their properties or reduce their loans and bonds. It remains to be seen how much the insurance companies will increase their stock investments from the present 9 percent.

The government's measure on stock buybacks sounds like a warning to companies to set out directly to support their stock prices like Samsung Electronics. Blue-chip companies will be sure to follow the order, but as many companies are still struggling with restructuring plans, it is expected to take some time to take effect. The long-coveted allowance of open-ended mutual funds was finally achieved, but observers remain skeptical over the effect of this measure due to the slump in the indirect financing market.

Market responses:

The composite stock index, which was falling sharply, turned around on the back of the government's measures to boost the stock market. The measures aimed at expanding financial resources seem to succeed in reassuring investors at the moment. But as the market fall was led by various factors such as the slump of NASDAQ, the slowdown of the microchip industry and the delayed restructuring of chaebol, the market situation needs further monitoring.

Lee Kang-Woon kwoon90@donga.com