Fatal exposure

Regulators scramble to harden stock market mettle

By Kim Tong-hyung

The United States is ground zero in the global financial turmoil, but it’s the stockbrokers in Korea who are leaping to their death.

While the dramatic plunge of the U.S. stock market, triggered by their credit downgrade and the escalation of the eurozone debt crisis, has caused massive ripples across the globe, it’s difficult to find any nation rattled as much as Korea.

The Korea Composite Stock Price Index (KOSPI) lost more than 16 percent or around $185 billion in value this month through Thursday, according to a Samsung Securities estimate, when even the Dow Jones managed to stem its bleeding to single digits. The dramatic skid proved fatal last week when a 48-year-old Kyobo Securities employee jumped to his death from a building in Daegu after heavy financial losses.

The Korean stock market has been at the mercy of foreign investors, who provide about one-third of the money invested in it, and the economy’s excessive dependence on exports makes it more vulnerable to external negatives.

A decimated stock market would pose a serious threat to the country’s financial stability. Many Korean individuals have borrowed heavily to spend on stocks and shares in a country where the 1 quadrillion won of consumer debt matches an entire year’s gross domestic product (GDP).

In the wake of the market chaos, Korean government officials last week imposed a three-month suspension of the short selling of stocks, which refers to the practice of selling borrowed shares in hopes of repurchasing them later at a lower price, in a desperate measure to calm equity markets.

Regulators are also scrambling to create new measures to curb destructive capital flow and reduce volatility in local financial markets. One of the ideas is to provide tax benefits and other incentives to lure foreigners into committing to long-term investments, a Financial Services Commission (FSC) official said.

Other suggestions include introducing a tax on financial transactions to reduce volatility in currency exchange rates and curb speculative trading on foreign exchange, a concept also known as the Tobin tax, after U.S. economist James Tobin.

However, experts are divided on whether the proposed measures would work as prescribed, when the shakiness of Korea’s financial markets is connected to the economy’s fundamental weaknesses which can’t be improved overnight.

``While it’s imperative that we find a way to reduce volatility in financial markets, we shouldn’t approach the problems with the goal to strengthen regulations, but must rather think of it as giving the markets a safety pin,’’ said an FSC official.

``We are considering several options, and providing tax benefits for foreigners investing in long-term investment products is one idea.’’

While admitting the need for better measures to protect financial markets against external factors, KB Securities analyst Kim Su-yeong questioned whether Tobin taxes and other controls on financial transactions would be the right way to go.

“It’s debatable whether Tobin taxes would be an advisable solution, but one thing is for certain, we need to continue to encourage the growth of the financial market so it acquires sterner mettle against global volatility,’’ said Kim.

``The Korea financial markets basically have to grow to a size where they can stand steadier against the coming and going foreign investors, and there is no quick way to achieve this. Introducing Tobin taxes would signal a reversal in the country’s financial policies. Brazil is one of the countries that have introduced such taxes, but it’s hard to say they made a dramatic difference. And Korea is nowhere near as attractive a destination for foreign investors as Brazil, so we need to be careful about introducing new regulations.’’

Korea last imposed a ban on short selling in the midst of the 2008 global financial crisis to protect the bourse from severe capital movement. The FSC lifted the short-selling ban on non-financial stocks in 2009.

The amount of short selling in Korea was measured at a daily average of 100 billion won during the first half of the year, but surged to 400 billion won per day in recent days, breaching the previous high of around 235 billion won set in September 2008. The FSC described short-sellers as ``mostly foreigners and institutions.’’

Financial regulators said they may consider lifting the ban ahead of schedule if the market regains stability.

``If market chaos calms, there is no reason to block short selling. We may consider lifting the ban before three months’ time,’’ Kwon Hyouk-se, the head of the Financial Supervisory Service (FSS), was quoted as saying in a meeting with the heads of foreign financial firms.