Hollow Times Ahead for Korean Stock Market?

A 36 year-old office worker, identified by his surname Kim and a residence of Yong-in in Gyeonggi Province, bought 1,000 stocks of “Applied Materials,” a semiconductor manufacturer listed in American stock exchange, for 13 dollars per share last year. He made up his mind to buy these stocks when he heard a person in Korea can trade on American stock market via the Internet. Currently, the stock price has gone up to 21 dollars per share.

Kim said, “The Korean stock market is easily influenced by non-economic factors such as politics and its fluctuation is significant. It is safer to invest in American stocks that tally similarly with business performances and market outlook.”

There are an increasing number of Korean investors who turn their eyes to foreign stock markets. Drifting street money is flowing into foreign stock markets that are relatively stable compared to the Korean market.

Meanwhile, the Korean stock market is mired in a “swamp of stagnation” to raise concerns of a “hollow stock market.” Both manufacturing and financing, two main pivots of the economy, are facing the risk of becoming “hollow.”

-- Losing money abroad

According to the Korea Security Depository, foreign stocks owned by Korean investors amount to 578.89 million dollars (approx. 665.7 billion won) based on their purchasing price. It is the highest number since 1994, and it increased by 118.04 million dollars (26 percent) from 460.85 million dollars last year.

Transactions of online trades in American stock exchanges showed a significant increase as well. During the first half of this year (January through June), Korean individual investors and corporations made a total of 4,500 transactions and invested 49 million dollars in American stock markets through the Home Trading Service (HTS). Compared with the same period last year, the number of transactions and the trading amount increased by 1,500 (50 percent) and 34 million dollars (227 percent) respectively.

For instance, in the Leading Investment and Securities, Co., online accounts to invest in American stock market increased to 1,600, up by 500 accounts from 1,100 at the end of January this year.

Kim Woo-suk, an international business team leader of Leading, said, “Every month, 100 accounts on average are added to invest in American stocks. This reflects the demand for investing in foreign stock markets that are relatively safe, or a growing desire to increase dollar assets due to the obscurity of the Korean economy.

This year has seen a rapid increase in the number of international funds that invest in stock markets, real estate, or commodities of foreign countries, such as Japan and the U.S. This demonstrates the international investment boom.

-- Worries about stock market hollowness

The Korean stock market, with its investors’ minds completely frozen, is currently near “exhaustion.”

Customer deposits, a barometer for measuring the spare buying power of individual investors, decreased by more than 2,200 billion won versus last year’s July average. Customer deposits dropped on Tuesday to 7,750.1 billion won, the lowest level in the last 18 months.

The trading amount is also around this year’s lowest level. Since the beginning of this month, average daily trading on the Korean stock market is 1,710.8 billion won, a 28 percent decrease from 2,360.4 billion won over the same month last year.

Park Mi-kyung, chief of the Yoido PB center of the Korea Investment and Securities, Co., Ltd., said, “Rich people are complaining that they don’t know where to invest while holding a bundle of money. Some of them are showing interest in foreign stock markets and real estate.”

Domestic stock brokerage companies are suffering a “direct hit from the bomb.” According to the Financial Supervisory Service, the pre-tax profit made by 42 domestic stock brokerages in the first half of this year (January to June) was 229.1 billion won, a decrease of 336 billion won (59.5 percent) from the same period last year.

Kim Hak-kyoon, a researcher for the Good Morning Shinhan Securities, Co., Ltd., said, “Manufacturing goes to China, Consumers and investors go abroad.” He showed his concern, saying, “When even stock market money goes abroad, the Korean stock market will lose its function as a capital market, and fundamentals in the finance industry will be weakened.”

Yong Park Jae-Seong Hwang parky@donga.com jsonhng@donga.com