Regulate foreign investmentEuropean and other foreign capital are rapidly exiting the Seoul market amid an escalating credit and financial crisis in the euro zone. The benchmark Kospi retreated to 1,840 and the won fell to 1,180 against the U.S. dollar due to the equity sell-off and increased short position. The toll on the local financial market is natural in a fully liberalized market, and authorities have sufficient experience and resources to contain external risks.
But we cannot shake off the feeling of frustration every time the local market takes a hit from turbulence in overseas financial markets. U.S. fund Lone Star recently notified authorities that it plans to take legal action against the government through international arbitration proceedings. It claims the fund and its investors suffered losses because Korean financial and tax regulators interfered with a series of unfair actions in its investment. It plans to demand that the Korean government return 390 billion won ($330 million) in profit tax it paid after selling a majority stake in Korea Exchange Bank, as well as other compensations.
Local share prices have taken a beating due to reckless unauthorized short-selling practices by foreign investors. Short sales are permitted on the local bourse, but selling without underlying borrowed securities is prohibited. Naked short selling, or betting on a price fall without tradable assets, can distort the market and exacerbate volatility. Despite the restriction, seven foreign investors were charged last month.
We must enforce order so foreign investors don’t underestimate our market. To do so, we need stronger regulations.
First of all, legal and tax regulations should be strengthened to prevent tax evasion sought by offshore funds like Lone Star.
Supervision and penalties on illegal trade by foreign investors should be enhanced. Authorities over the last 10 years have carried out a crackdown on illegal short selling practices only once in 2008. The 50 million won penalty is too soft.
We must keep our market open and liberalized in order to uphold international credibility as a global financial hub. But an open market does not license illegality and negligence. Stringent control and supervision can make a market more transparent, fair and reliable. We have seen the two-faced nature of foreign capital.
A market as small as ours depends on foreign capital. But it is time we put an end to the market’s poor reputation as being the most volatile and easy prey to foreign predators.