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Nation endures unproductive investments

Published: 12 Mar. 2025, 00:02

Park Sun-young

The author is an economics professor at Dongguk University.

Over the past month, three asset markets that draw keen interest from retail investors have shown concerning trends.

First, Seoul’s real estate market. A month ago, certain areas in Seoul were removed from the designated land transaction permit zones, reigniting the once-dormant housing market. As property prices in these regions, suppressed for the past five years, began to rise, the anxiety of those without homes has deepened. This surge in housing demand is evident in loan statistics: in the past month, new home mortgage loans from the five major commercial banks reached 7.49 trillion won, a 34 percent increase from the previous month. Adding to the momentum are expectations of a Bank of Korea rate cut, financial institutions’ competition to lower lending rates, and the rising scarcity value of Seoul’s key real estate due to regional population decline. Given these factors, the upward trend in housing prices appears difficult to curb in the near future.

Apartment buidings are seen from Mount Namsan, a peak in Jung District, central Seoul, on Feb. 2. [YONHAP]

Second, the U.S. stock market. Due to uncertainty surrounding former President Donald Trump’s tariff policies and the broader U.S. economy, the Nasdaq has fallen 6.8 percent over the past month. According to the Korea Securities Depository, domestic retail investors who invested in leveraged U.S. exchange-traded funds (ETFs) have suffered losses ranging from 20 percent to 50 percent. The most heavily bought ETF, the Direxion Daily Tesla 2x ETF, recorded an average Korean-won-denominated return of -30.7 percent over the month.

Third, the cryptocurrency market. As a riskier asset class than equities, cryptocurrencies tend to fall even more sharply when the U.S. stock market declines. Last Friday, Bitcoin continued its downward trajectory after a much-anticipated White House “crypto summit” failed to meet market expectations. While the U.S. government stated it would only hold confiscated Bitcoin as a strategic asset, it did not announce additional purchases, leading to widespread disappointment. During the second week of March, bitcoin declined by 11 percent, ethereum by 17 percent, and ripple by 23 percent.

For most retail investors, these three market trends paint a grim picture. Young people in Korea find homeownership unattainable through labor income alone. In response, they turn to leveraged investments in U.S. stocks or cryptocurrencies — yet few individual investors succeed in such high-risk ventures over the long term. Risk assets experience sharp declines, leading to heavy losses, while real estate drifts further out of reach. The burden is difficult to endure.

The situation is equally challenging for policymakers. In central Seoul, additional housing supply beyond redevelopment projects is difficult to secure. Meanwhile, domestic economic stagnation leaves little choice but to lower interest rates. However, lower rates spur demand for loans, funneling capital into real estate instead of boosting consumption — exacerbating hardships for small businesses. Additionally, South Korean investors' increasing exposure to U.S. stocks contributes to the depreciation of the Korean won. As of last summer, direct overseas stock investments by individual investors exceeded $90 billion, accounting for approximately 6 percent of the domestic stock market capitalization.

Moreover, Korea leads the world in cryptocurrency trading volume relative to population. It remains the only country where cryptocurrency trading exceeds stock trading in volume. The common thread among real estate, overseas equities, and cryptocurrencies is that they do little to enhance Korea’s economic productivity.

Why have South Koreans developed such an investment-oriented mindset? Why do they, despite being occupied with their primary occupations, feel compelled to analyze U.S. economic indicators and dissect Trump’s remarks in order to manage their personal investments? One key reason is the immaturity of Korea’s pension system compared to those in the United States and Europe, forcing individuals to take responsibility for their own retirement security.

A child plays on the floor during the trading day on the traditional bring-your-kids-to-work day on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., November 29, 2024. [REUTERS/YONHAP]

Korea’s National Pension Service (NPS) was only introduced in 1988, and its corporate retirement pension system was established in 2005. In contrast, Germany launched its public pension system in 1889, the United Kingdom in 1908, and the United States implemented the Social Security Act in 1935 and the Employee Retirement Income Security Act (ERISA) in 1974. In advanced economies where public pension systems are well-developed, workers who have participated in the labor market for a certain period do not worry about retirement.

For instance, in the United States, institutional investors — such as public pensions, 401(k) retirement plans, and mutual funds — account for more than 70 percent of stock market transactions. These institutional investors prioritize shareholder value, compelling corporate executives to focus on business growth and stock price management. Through retirement plans, American workers indirectly invest in domestic equities, and this capital serves as long-term funding for innovative companies. Ultimately, corporate growth translates into economic development and job creation, while stock market gains benefit workers’ retirement income. This virtuous cycle is a cornerstone of the U.S. economy.

In contrast, Korea’s social fabric was shaped by different historical circumstances. Until 1997, the nation operated under a seniority-based employment system, upheld strong traditions of filial support for aging parents, and expected continued economic and demographic growth — factors that delayed the development of a robust retirement security framework. As a result, today’s Koreans find themselves navigating an uncertain future alone. Meanwhile, the domestic capital market continues to be plagued by shareholder rights violations, prompting capital to flow into sectors that do not contribute to national productivity.

To simultaneously ensure retirement security and foster future growth engines, Korea must cultivate a sound capital market ecosystem and establish a functional retirement security system. Politicians bicker over whether to set the NPS income replacement rate at 43 percent or 44 percent, yet fail to enact substantive reforms. No matter how many multi-trillion-won investment funds they propose or how eagerly they latch onto artificial intelligence investment themes, retail investors must not be swayed by empty rhetoric.

Translated using generative AI and edited by Korea JoongAng Daily staff.