The untouchable money
The author is the Tokyo bureau chief at the JoongAng Ilbo.
All the Korean businessmen I met in Tokyo are grieving. They grumble about increasing regulations, steep wage hikes, excessive outside meddling in management and the struggling economy in Korea. To them, the Moon Jae-in administration’s economic policy has become a recipe for disaster in business.
They are even worried about the government’s profligate fiscal spending, not just because of the nation’s deteriorating fiscal health, but because of the ramifications for them. Since government spending has so far offered little relief, they fear the government could again turn to rich corporations when it runs out of money in its own coffers.
The ruling party habitually picks at the colossal cash piles of big companies. The issue is one of the favorite topics of anti-chaebol activist groups. They claim that the riches should be returned to consumers, as they are the ones who made the companies wealthy. They bring up the good and evil dichotomy to back up its argument. A state facing an emergency could turn to volunteer troops if it is short on regular soldiers. But it should not be tempted to mobilize the volunteer army.
The government’s stance does not make sense. The corporate sector’s cash reserves of 1 trillion won ($885 million) does not mean that the money exists in corporate accounts. Let’s assume a bakery made a profit of 100,000 won. If it uses the money to buy a 100,000-won oven, the bookkeeper would write down “oven” on the left column reserved for debit (the money or asset-in category) and 100,000 won on the right (the money-out category). The 100,000 won stays in the balance, even though it is spent on a new asset. As long as money is made from operating activities, the cash equivalent increases. The entries on the right show the sources of funding: for instance, whether it was borrowed, made from operating activities or invested in by shareholders. In contrast, the entries on the left show how the money was spent — for example, whether it was used to purchase machinery or build factories or whether it is cash held for future investments or mergers and acquisitions.
The government has tried to dig into corporate cash reserves to help prop up the economy before. In 2015, it enacted a three-year binding law aimed at slapping 10-percent punitive taxes on cash reserves if a company does not spend more than 80 percent of its annual profits on investment, dividends and wage increases.
A recent study showed that the punitive tax did not lead to increases in pay, investment and dividends. Some in the ruling party even proposed forcing companies to use their cash reserves to increase wages. But net cash is a figure that is reached after paying employees’ salaries. There is only one way for wages to affect cash reserves. Wages should be increased until the balance sheet turns red. No management would run business that way.
Similar calls have been made in Japan. Japanese enterprises sit on a cash hoard of 426 trillion yen ($3.8 trillion) as of the end of March. The figure has been growing by record amounts every quarter. Politicians have been arguing that companies should use some of their cash to reinvest or increase salaries. But talks fizzle out after elections. Tokyo does not attempt to compel companies like Seoul does.
Corporate cash reserves are not an area that the government should meddle with. Companies stock up cash for different reasons. They set it aside for later emergencies, investments or rewards for shareholders. Can the government make amends if corporate value is undermined due to deterioration in the company’s cash flow? When stock values decline, so do the holdings of the National Pension Fund, which invested in them. That puts the public’s lives at risk. The ramifications are wide and broad.
Cash hoarding, though, is not healthy. Companies that suffered liquidity shortages tend to hold onto as much money as possible. Cash and cash equivalent savings have surged among Japanese companies since 2008. If the trend does not stop at a few companies and becomes a common practice, this could become a problem as companies must invest for their future.
However, companies cannot be forced to spend. Corporate investment naturally increases when business and the economy are in an upturn. Cash reserves are increasing for companies around the world. Some economies are doing well. Therefore, corporate cash hoarding cannot be blamed for the economic slump. Finding fault with it is another way for policymakers to blame someone else for their failures.
Corporate investment does not necessarily have to come from cash. Companies can lend or raise funds through stock or debt issuances for investment.
It is up to companies to choose the best method under the current economic conditions. Their priority must be to raise the profit margin. Companies must be able to generate more value and raise productivity in order to increase hiring and wages. The ruling party must find ways to boost productivity instead of eyeing the corporate sector’s cash pile.
Cash reserves are not available for anyone. Some economists claim the term should be changed to “after-tax funds for reinvestment.” The term could be made even simpler. We should call it a “safety fund” or “backbone fund.” As the backbone must be the pillar for the body, it cannot be lent out for others to use.
JoongAng Ilbo, Aug. 24, Page 31