[Opinion] Sell Korea

The U.S. subprime mortgage crisis has sent shockwaves through the global economy. Worryingly, some experts say the crisis has just begun. Washington’s rescue plan for two mortgage giants has seemed to allay fears. Recently, however, worry is growing over a domino effect in the credit crisis affecting large-scale banks, automotive financial services and credit card companies. Risk factors have infected related sectors like viruses due to intermingled investment relations among financial institutions. Some argue that the warning “Financial derivatives are the seeds of catastrophe” has materialized.

Facing a series of financial difficulties, Korea’s stock market helplessly went into freefall yesterday as foreign investors, who have played a critical role in the market, dumped their stocks. Net foreign selling continued for 27 trading days from June 9 to yesterday reaching 7.5 trillion won (about 7.5 billion U.S. dollars). Worse, the amount of foreign net selling this year has surpassed 20 trillion won, reflecting a change in the foreign investment framework toward Korean stocks in nine years. Foreigners’ share of the Korean stock market rose from 18.6 percent in 1998 to 40.1 percent in 2003. After peaking at 44.1 percent in April 2004, it has rapidly fallen to under 30 percent.

Net selling volume has increased since cash-strapped foreign investors have sold their stocks in Korea. When will Korea’s stock market get the money back? Some experts say foreign investors have left for several reasons, such as Korea’s waning attractiveness as an investment destination and risk management. They are also barely expected to return. Analysts at the Wall Street Journal have even expressed frustration over President Lee Myung-bak’s hesitation to introduce business-friendly policies. On the other hand, some experts say foreign investors have sold their stocks for profit and will return to Korea.

From a broad perspective, foreign investors are apparently selling Korean stocks to reduce risky assets in their portfolios. Unsold firms, factories, stores and houses accumulating on the Korean market also reflect investors’ struggle to reduce risk. Since growth potential has weakened and consumption and investment show little sign of recovery, entrepreneurs, small business owners and households are struggling to reduce their losses as much as possible. This means the economy will need a long time to recover.

Editorial Writer Hong Gwon-hee (konihong@donga.com)