[EDITORIALS]Curbing ‘hot money’ flows

The government has decided to take action against the rapid inflow of “hot” money from overseas since these funds are highly speculative. Within the last two months, the amount of foreign capital pouring into Korea has amounted to $4 billion. As a result, the Korean won has strengthened sharply against the U.S. dollar and stock prices have surged. If the Korean economy were moving in this direction because of recovery, it would be a welcome sign. It is problematic, however, because it is not.
These results cannot be explained by saying that Korean stock prices are undervalued, or that the fundamentals of the Korean economy are sound. With no change in Korea’s economic conditions, the U.S. dollar has depreciated more than 6 percent against the won in the last three months, and 15 won in a week. The Korean won has strengthened more sharply than the currencies of Taiwan and China against the U.S. dollar.
Moreover, the foreign funds seem to be aiming at short-term profits from fluctuations in stock prices or exchange rates, rather than pursuing long-term investment in stocks. Usually, when foreign investors invest in Korean stocks they sign a separate contract to be protected from exchange-rate risks. This time, they have not been signing such contracts.
If this influx of hot money is not blocked in time, the side effects will become serious. When these funds, after gaining short-term profits, slip out of Korea all at once like an ebbing tide, stock prices will nosedive and financial markets will be shocked. And keeping the exchange rate excessively strong will have a negative effect on exports. To small and medium industries, which are more vulnerable to exchange-rate fluctuations, it will be fatal.
While domestic consumption is at a low, the Korean economy is being sustained by exports. Under such circumstances, if exports decrease because of hot money, pump-priming measures by the government will be futile and the economic recession will deepen. The government should protect the economy from being hit by the rush of hot money into Korea.