Showing our weaknesses
Contrasting comments made in New York on the effect of further interest rate cuts by Finance Minister Choi Kyung-hwan and Bank of Korea Gov. Lee Ju-yeol earlier this month made news back home. The men were criticized for their contrasting policy views at a time when they should be united for the sake of the Korean economy and the credibility of government policy.
The two were in New York to attend gatherings of G-20 finance ministers and central bank governors taking place alongside the annual meetings of the International Monetary Fund and the World Bank. Choi hosted a government-sponsored investor relations meeting for foreign investors at Manhattan’s Four Seasons Hotel. What he said at the event wasn’t very meaningful. I personally don’t see why the government bothers with such events. Proponents would argue that such events increase foreign investors’ understanding of and interest in the Korean economy, encouraging them to invest more.
If they truly believe this, policy makers are naive. Multinational investors know the Korean economy probably better than the policymakers themselves. Ministers last for one or two years, but Korean specialists at multinational financial institutions have been studying the economy for years or even decades. Based on their global networks and sophisticated analyses, they make investment decisions on Korean markets by comparing daily movements in foreign exchange, interest rates and stock prices. It is the public policymakers who should pay close attention to them and their reports to incorporate in policies. There is nothing new Korean policy makers can tell the savvy investors of our globalized world.
Moreover, greater understanding of an economy does not translate into more investments. In fact, the more an investor knows about the Korean economy, the more likely he or she is to use that knowledge to reap benefits by pulling out investments when the economy turns bad. The global financial markets are a daily battlefield. There is no such thing as a win-win. If someone wins, someone else loses. Exchange rates prove the point. If the value of one currency goes up, another must go down. If someone makes a profit, someone else must lose.
In the past, there were some win-win cases in bond and equity markets. But since derivatives kicked in, the zero sum rule prevails. In derivatives, one must always be in an opposite position. The market is an eternal tug-of-war between investors playing long, betting on upticks in prices and selling short when they bet on the opposite.
Most common investors, or non-experts, play long to be on the safe side while the minority expert group opts for higher risks and takes short positions. Non-experts tend to mimic experts, which means a market can be distorted by a select investor group. A country is no different.
Back in 2008 to 2009, when the world seemed on the edge of an abyss following the Wall Street-triggered global financial meltdown, the Korean government hosted investment relations seminars in several cities to assure the outside world that the economic fundamentals of Korea were strong, regardless of the volatility in stock and foreign exchange markets. Policy makers were literally telling those investors not to change their investment positions and not to short on Korea.
But foreign investors took the opposite direction. Before Lehman Brothers went under in September 2008, foreign investors yanked more than $60 billion from the Korean stock and bond markets. During the next four months, foreign banks’ operations in Korea repatriated $25 billion to $30 billion to their headquarters. The Korean markets were bombarded with a foreign selling spree. Foreigners sold off 30 trillion won worth of Korean stocks in eight months. The dollar shot up to 1,600 won.
A government holds investment relations meetings to prove that nothing is wrong with the economy. Korea held similar events just before it sought an international bailout late 1997. Investors wake up when a government suddenly holds an investment relations seminar. It basically underscores a country’s weaknesses.
Like I said, it’s a battlefield out there. The government should follow the rules. There is no need to show all our cards through such seminars. The government instead should make itself less scrutable - and watch out for speculators.
JoongAng Sunday, Oct. 26, Page 31
*The author is an economics professor at the National University of Singapore.