Foreigners see market as source of ready cash

A phenomenon that local media have dubbed the “ATM Korea effect” refers to foreign investors using Korea’s highly liquid financial market to withdraw money every time they are spooked by worldwide economic turmoil.

This effect and its drawbacks can be seen in the local stock market.

Foreign investors net sold a whopping 5.36 trillion won ($4.5 billion) in August and 1.28 trillion won in September after the downgrading of the U.S. credit rating unsettled the global market.

They were a key driving force behind the benchmark Kospi’s decline of 17.04 percent during those two months, causing the primary stock market to lose roughly 225 trillion won in market capitalization.

Foreign investors such as huge national pension managers, overseas banks and brokerages are involved in investments worldwide. But their impact tends to become exaggerated in the Korean stock market because foreigners account for a larger percentage than in other nations.

According to the International Monetary Fund, foreign holdings in Korean stocks reached 32.1 percent of Korea’s GDP as of the end of last year. This was dramatically higher than the same ratio in the U.S. (14.1 percent) and Japan (13.9 percent).

“As foreign investors occupy a high percentage of the domestic stock market, when [global] economic conditions are bad local stock prices plummet with the exodus of foreign capital,” said Oh Seong-jin, an economist at Hyundai Securities.

Unlike China, with its many restrictions in foreign investments and flows of capital, Korea has virtually no restrictions on capital market investments from abroad. The local market was fully opened and liberalized in exchange for bailouts during the Asian financial crisis of 1997.

So when foreign investors need to get their hands on ready money amid a highly unpredictable global market, Korea’s capital market is a favored target.

[joyce@joongang.co.kr]