Korean-style QE is a bad idea

The ruling Saenuri Party pledged that once the 20th National Assembly is in place after Wednesday’s general election, it will seek to tweak the Bank of Korea Act within the first 100 days to set the legal grounds for enforcing quantitative easing (QE), or a large-scale bond purchase program. Former Finance Minister Kang Bong-kyun, who co-spearheaded the campaign committee for the party, floated the concept of Korean-style QE by allowing the central bank to purchase industrial finance debentures — quasi-government bonds issued by the state-run Korea Development Bank (KDB) — and mortgage-backed securities from financial institutions directly from the market.

The Bank of Korea (BOK) — like all other central banks — buys and sells government bonds in the open market to help moderate money supply and short-term interest rates. The central bank is prohibited by law from purchasing securities directly from an issuer. The BOK can only buy government bonds or debt whose payment is guaranteed by the government.

Industrial finance debentures and mortgage-backed securities are not guaranteed by the government. That is why the ruling party wants to revise the Bank of Korea Act. It is up to the voters to decide whether the idea is right for us. We must deliberate on the exact design of the proposal.

Quantitative easing refers to large-scale asset purchases. It is an unorthodox monetary policy in which a central bank buys government securities or other securities from the market to lower interest rates and increase money supply. It is employed when the central bank runs out of other conventional options to increase liquidity, in particular by lowering the base interest rate in an economy.

The aim is to bring down long-term rates through the central bank’s purchase of government debt or guaranteed securities. Reduced supply brings down the yield or prices of the bonds. Investors would have to turn to other unguaranteed and riskier bonds issued by private companies instead. Higher demand will send corporate bond prices higher and lower the borrowing cost for companies to allow them to issue more debt and raise liquidity. The increased liquidity would allow companies to invest and hire. In theory, this is how QE can inflate liquidity and revive a troubled economy.

The Bank of Japan first experimented with the bond purchase program in 2001, and the European Central Bank also resorted to the unconventional means from March 2015. The U.S. Federal Reserve carried out three rounds of QE from March 2009 until last year, injecting a total of $4 trillion. The U.S. economy became strong enough to make the Fed normalize monetary policy in December by lifting the base rate by 25 basis points from near zero for the first time in seven years.

The so-called Korean QE is a bit different. Kang said Korea’s program does not aim to inflate money supply like the United States and Japan, but to restructure the economy through funding from the central bank. The KDB would use the funds it raises by selling its debt to the BOK only to clean up distressed companies. Financial institutions will also specifically use the funds they raise from the central bank to help homeowners redesign mortgage-backed loans for longer maturity and less of a burden in repayments. Kang refers to the program as “Korean-style” because it is specifically aimed at funding corporate and household debt restructuring instead of stimulating the economy.

Elections are all about packaging, but this has gone too far. The BOK already has the authority to provide special loans to financial institutions to help them fund troubled corporate debtors. The central bank provided such loans when shipping companies were on the brink of insolvency in 1985; when financial institutions faced bank runs following the financial crisis in 1997; and when the banking sector wobbled following the global financial meltdown in 2008.

QE is also questionable. KDB debt is already in high demand. The securities are quickly snatched up as soon as they arrive on the market. The Korean economy is troubled not because it is short in terms of liquidity, but because of its waning competitiveness. One more thing: Corporate restructuring is not an agenda to be approved by voters, but a policy priority the government must pursue to keep Korea Inc. afloat, the economy sailing and all boats floating.

JoongAng Ilbo, April 13, Page 28

*The author is the head of the international business news team at the JoongAng Ilbo.

Kim Jong-yoon