중앙데일리

Gov’t will intervene if necessary

Markets react to Japan retaliations, trade war between U.S., China

Aug 07,2019
The government said it will intervene in the financial market to combat volatility in the wake of a deepening U.S.-China trade row and export restrictions from Japan.

After global uncertainties left the benchmark Kospi at its lowest level in three years, and the Korean won depreciated against the dollar by 1.4 percent on Monday, government officials called for calm Tuesday.

“As recent uncertainties in the financial and foreign exchange markets continue, the government […] will actively respond to the excessive worries in the market,” said Bang Ki-sun, deputy minister of economy and finance, during a meeting with financial authorities. “If market volatility expands too much, we will take swift and bold market stabilization measures based on a prepared contingency plan.”

The specifics of the plan were not disclosed on purpose, according to the Ministry of Economy and Finance.

The comments followed the United States designating China a currency manipulator on Monday after China’s yuan weakened past the psychologically important 7 yuan to the dollar level. The designation was the latest move in an intensifying trade row after the United States announced last Thursday it will impose new tariffs on Chinese goods.

Uncertainties are mounting for Korea as it battles Japan’s expanding export restrictions.

Bang acknowledged the growing headwinds but called for trust in the fundamentals of the local economy.

“The Korean economy’s soundness against foreign influence has greatly improved from the past, and with the existing foreign confidence in our economic fundamentals, there is a need to calmly monitor the situation, and it is not desirable to overreact,” said the deputy minister, citing Korea’s $403.1 billion in foreign currency reserve and positive credit ratings from global agencies.

Markets were less optimistic on Tuesday as the benchmark Kospi closed down 1.51 percent at 1,917.50. The main bourse fell as low as 1,891.81 at one point, a slide of 2.83 percent. This was the first time since June 24, 2016, that the index fell below the 1,900 point level.

The won experienced high volatility, although ended unchanged from Monday’s close of 1,215.3 won against the dollar. The won weakened at one point earlier in the day to 1,220 won against the dollar, raising suspicions of government intervention.

The Financial Services Commission (FSC) clarified the measures the government could take to stabilize the stock market such as tightening regulations against short selling.

“We will act swiftly and boldly by selecting policies that are appropriate to the market situation among all the tools that are available, including easing regulations on companies buying back shares, tougher regulations on short selling and reducing daily limits,” Sohn Byung-doo, FSC vice chairman, said during an emergency meeting with financial institutions on Tuesday.

In October 2008, when the market was roiled by the global financial meltdown, the FSC halted short selling for eight months until May 2009. The financial authority again banned short selling between August and November 2011 after markets tumbled on fears of sovereign risks stemming from Europe.

Sohn urged institutional investors to take an active role in the stock market to help reduce volatility, stressing that pension funds will shore up stocks as Korea’s largest institutional investors.

“We can’t entirely depend on the pension funds,” the FSC vice chairman said. “But they are the largest [institutional] bodies that have the reserves to increase purchases.”

He added that if pension funds are not sufficient, the government will consider creating a market stabilization fund.

Analysts expressed worries about the situation.

“The major concern lies in the fundamentals rather than foreign exchange or the financial markets,” said Jeon Seung-ji, an analyst at Samsung Futures.

“Concerns around losses of Korea’s competitiveness will expand amid trade uncertainties between the United States and China and between Korea and Japan.”

“With the drop in semiconductor prices and the prolonging of tensions between the United States and China and Japan’s export restrictions of key materials,” he continued, “expectations are falling for an improvement for the semiconductor industry.”

The won is also expected to remain weak against the dollar with the ongoing global trade conflicts.

“With increased uncertainties due to the heightened U.S.-China trade row, a trade dispute with Japan and lowered expectations for growth for Korea’s economy, the won against the dollar will likely stay above the 1,200 won mark for some time,” wrote Lee Young-hwa, an economist at Kyobo Securities, in a report.

Korea’s economy has seen slowing growth this year, with the Bank of Korea (BOK) recently downgrading its gross domestic product (GDP) growth projection by 0.3 percentage points to 2.2 percent. The Finance Ministry also lowered its growth target for this year from a range of 2.6 percent to 2.7 percent to 2.4 percent to 2.5 percent.

Concerns about the economy have grown as Korea’s exports keep falling. Outbound shipments dropped 11 percent in July from the previous year, the eighth consecutive monthly decline. Export uncertainties are expected to continue after Japan removed Korea from a so-called white list of preferential trade partners, which will be implemented on Aug. 28. The move will tighten exports of nearly 1,200 Japanese products to Korea.

There is already growing speculation in the financial market that the Korean central bank could make another interest rate cut this month. The next monetary policy committee meeting is scheduled for Aug. 30. After that, one is not scheduled until October.

The BOK shaved 0.25 percentage points from the key interest rate in July, bringing it to 1.5 percent. It was the first cut since June 2016. The central bank cited worries about Japanese restrictions and the trade conflict between the United States and China. The central bank has lowered the key interest rate in back-to-back months only in times of crisis. The BOK lowered interest rates for three consecutive months between July and September in 2001 in the aftermath of the Asian financial crisis in the 1990s. The bank cut the key interest rate six times over five months between October 2008 and February 2009 in the wake of the global financial meltdown.

BY CHAE YUN-HWAN, LEE HO-JEONG [chae.yunhwan@joongang.co.kr]


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