Koreans made big bets with household balance sheets

Bank of Korea main office in central Seoul. [YONHAP]

Koreans borrowed record amounts, drew down their savings and bought stock and bonds at an unprecedented pace in the third quarter of 2020, according to a Bank of Korea report released Thursday, while the government borrowing ballooned 16-fold.

In that quarter, household borrowings from financial institutions more than doubled on year, from 23.4 trillion won ($21.5 billion) to a quarterly record of 52.6 trillion won, while the amount of money deposited by households at financial institutions declined by 10.3 percent on year to 24.5 trillion won.

Flow of funds figures and other statistics suggest that a lot of this money ended up in the stock and bond markets.

From the 83.8 trillion won in financial assets acquired by households in the third quarter, 22.5 trillion won was invested in local stocks and fund products. An additional 8.2 trillion won was invested in foreign stocks and bonds.

Household investment in both local and foreign stocks and bonds hit a quarterly record based on the data, which has been compiled since 2009.

The rally in Korean stocks has been driven by demand from retail investors, who have poured their available funds into a wide range of investments, from initial public offerings to shares of Korea’s largest companies. According to data from the Korea Exchange, retail investors net purchased 63.9 trillion won worth of shares last year, while other investor categories — institutional investors and foreign investors — net sold.

Retail investors played a big role in pushing the Kospi beyond the 3,000-mark, though they turned to net sellers on Thursday.

Some mystery remains as to where all the wealth actually ended up, especially given the fear-of-missing-out rally in property.

It’s not easy to tell whether money taken from savings went into real estate or stocks, and it is likely that the funds flowed to both asset classes, Jung Kyu-chae, head of the flow of funds team at the central bank, notes.

“Borrowed money was used mainly to buy houses, invest in stocks” and to cover household expenses, he said.

Household net lending, including the net lending of small unincorporated enterprises owned by households and non-profit institutions serving households, increased by 84.9 percent year-on-year from 16.6 trillion won to 30.7 trillion won in the third quarter, according to the central bank.

Net lending and borrowing in flow of funds is calculated by subtracting net liabilities from the net acquisition of financial assets.

While household financial assets and liabilities both increased, assets increased more sharply.

Government net lending dropped from 16.4 billion won in the third quarter of 2019 to 8.8 trillion won in the same quarter last year as borrowing rose from 1.3 trillion won to 21.8 trillion won over the same period.

A jump in borrowing was largely due to the sale of government bonds. Funds raised from the bond sales were used to support the economy during the pandemic.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]