Philip Bowring: Who owns South Korea?

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Tue Jul 20 2004 - 22:11:24 EDT

from pen-l. If I remember correctly, Sukhamoy Chakravarty analyzed
the underlying dependence of the Korean economy in the 80s.

IHT article:

   The International Herald Tribune

Philip Bowring: Who owns South Korea?
Philip Bowring IHT
Monday, July 19, 2004

Foreign vs. local investment

HONG KONG At one level South Korea represents a triumph of globalization
over economic nationalism. Yet because of the head-in-the-sand policies of
the Seoul government this could well turn sour.

Foreigners now own most of the commercial crown jewels of South Korea, the
newest and seemingly most nationalist member of the developed world.
Whether it is the world's leading chip maker and mobile phone challenger,
Samsung Electronics, or the world's largest and most profitable steel
producer, Pohang Iron Steel, or Korea's major financial groups Kookmin and
Shinhan, most of Korea's high-profile companies are now more than 50
percent owned by foreigners. In some cases the foreign stakes go above 70
percent. Foreigners now account for 44 percent of the total Korea stock
market capitalization of around $360 billion.

The statistics are especially remarkable given that less than a decade ago
foreign ownership of equity in Korean companies was highly restricted.
Even when the nation joined the OECD in 1996, liberalization was at
snail's pace. It took the Asian financial crisis and strong-arm IMF and
creditor tactics to force Koreans to accept almost unrestricted foreign

Koreans still often express resentment at how the sudden withdrawal of
foreign bank lending in 1997-98 caused a collapse in the Korean currency
and asset values. The crisis opened the way to equity capital
liberalization and made it possible for foreigners to acquire large
portions of Korean commerce and industry at very depressed prices.

Nor was this just a one-time process. The foreign buying of Korea has
continued steadily, and with occasional big waves. Over the past year some
$25 billion in new foreign portfolio equity has arrived.

So far there has been no major backlash. Koreans may be uncomfortable with
the numbers, but they can take comfort from the fact that in most cases
foreign ownership is fragmented and management control rests firmly with
Koreans - frequently with the families of the former major shareholders.
Still, resentment of foreigners, especially when they try to exercise
their rights as shareholders, lurks not far below the surface.

Yet Koreans are failing to acknowledge that they themselves now bear the
main responsibility for the foreign capital invasion. Instead of buying
their own companies, they are investing in government bonds, houses and
U.S. debt.

Despite foreign buying, Korean equities continue to be priced at a
fraction of overseas equivalents. The Korean stock market is selling on
nine times its historic earnings compared with 21 for the S&P 500, 14 for
London, 15 for Taiwan, 16 for Hong Kong or 32 for Japan. The foreign
owners are even collecting dividend yields of around 2.5 percent - as much
as Koreans are earning on their massive holdings of short-term U.S. debt.

The fact is that individual Korean savers are put off equity investment by
the volatility of the market, and by memories of 1997. In turn, volatility
is a result of the lack of Korean institutional investment, which is a
direct result of laws forcing the majority of Korea's vast household
savings held in insurance and pension funds into bonds and fixed deposits.
While foreigners buy their farm, Koreans are buying bonds.

The situation grows more ridiculous by the day. The government is in the
process of issuing vast quantities of won-denominated bonds as a "war
chest" in order to be able to sell won and buy dollars to prevent the
exchange rate from appreciating. This obsession with maintaining an
undervalued currency will result in further expansion of bloated foreign
reserves. These are now $230 billion - far more than the foreigners have
spent acquiring their 44 percent of Korean equities.

The Korean government's failure to let market forces determine the
exchange rate is leading directly to the foreign acquisition of Korean
assets by keeping them cheap in dollar terms and channeling Korean savings
into U.S. consumer debt rather than into ownership of the true pride of
Korea - Samsung, POSCO, etc.

Such dumb policies could spark both a nationalist backlash in Korea and a
trade backlash by Korea's trading partners.

IHT Copyright  2004 The International Herald Tribune |

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