Peter S. Kim is a managing director at KB Securities.
Where is Korea's tech future?
Peter S. Kim
By Peter S. Kim
Leading up to the June presidential election, Korea's main bourse, the KOSPI index, was already one of the best-performing markets in Asia. Following President Lee Jae Myung's win, the KOSPI has experienced a melt-up-type market reaction, raising concerns about overheating.
In particular, investor fervor is fueled by the new government's push for artificial intelligence (AI) and stablecoins, bringing impressive and sustained gains in related stocks within a couple of weeks. As investors with decades of experience learn, stock prices repeatedly swing between the hopes and the reality of a particular theme. Only a few weeks into the new administration, it would seem investors are already pricing in best-case hopes for the Korean tech sector, which has a long road ahead before proving itself in the intense battle for AI supremacy. China's last decade of pursuing tech ascendency offers living proof of how difficult that mission can be.
The KOSPI rally has been a surprise for several reasons. First, there has been no discernible upgrade in macro or corporate fundamentals driving the booming sentiment. Second, buying is mainly coming from local investors without active participation from foreign investors, who are known for a strict fundamental approach and unlimited buying power.
A typical bull market cycle in Korea begins with foreigners attracted by cheap valuations buying near the bottom of the macro cycle. Then, local institutions join in the second stage as corporate earnings improve. Finally, local retail investors take over near the peak of the market cycle as momentum chasers. It is during the third and final stage that we observe exuberance on themes, sectors and stocks, which often leads to bubbly valuations. The current rally, therefore, is unusual because local investors took early market leadership with foreign investors still sitting on the sidelines.
One of the hot themes local investors are very excited about is AI and stablecoin initiation by the incoming government. Lee has declared AI development one of his key priorities, pledging 100 trillion won ($73.6 billion) in funding to boost progress. Thus far, policy announcements have been limited. Nevertheless, reminiscent of the technology, media and telecommunications bubble, related stocks are suddenly rallying on vaguely articulated government plans. Amid such investor optimism, it is a good time to reflect on a similar, but much more ambitious, tech-related policy drive from China: Made in China 2025 (MIC2025).
Exactly 10 years ago, China announced the MIC2025, an ambitious plan to be not only a manufacturing powerhouse but also a tech juggernaut. Initially, many, including Korea and Japan, dismissed it. After all, Japan's similar goals took many decades, from the 1970s until its technology was considered competitive. After Japan's rise, Korea's ensuing pursuit of Japan was also decades in the making.
However, China has proven even more impressive, as MIC2025 has been a project of self-sufficiency, allowing the country to reduce its heavy dependence on imports for its manufacturing sector. MIC2025's 10-year anniversary is marked by China turning into a disruptive exporter of many high-end products. While much of the surge in exports was necessitated by China's need to shore up its domestic economy, the products have been surprising customers not only with their affordability but also their high quality. It is a repeat — albeit on a much bigger scale — of what Hyundai and Samsung went through during their heyday of challenging global competition.
China's export pricing strategy will matter significantly for the global macro outlook as it will have a direct impact on the inflation path of many importing countries. With the looming tariffs, competition for market share is about to get intense across the global supply chains of many sectors. China's struggling domestic economy means Chinese companies will try to compensate by aggressively pushing out exports. As a result, importing nations will feel the inflation impact — especially in Asia, where consumer prices are especially sensitive.
Historically, the low-cost pricing strategy used to be synonymous with manufactured goods, including tech hardware. Samsung and other corporations from Korea and Taiwan, in particular, have worked their pricing playbook to expand market share in developing markets until they improve product quality, then expanding into developed markets. But China's version is different; China is not only going after the hardware side of the sector as seen from Japan, Korea and Taiwan.
As encapsulated by the DeepSeek revelation, China is going after the tech edge enjoyed by the West for over a century. It is fair to say that China has now surpassed Europe as the second-most tech-savvy nation behind the U.S. It has been precisely 10 years since the kickoff of MIC2025, and the emergence of DeepSeek has proven that China is not only closing the gap in manufacturing, but also in AI areas, where it had pulled ahead of Korea and is now challenging the U.S.
In Korea, it would seem that the animal spirits have miraculously taken hold of the stock market following the martial law letdown. The local investor-led fervor has been driven by a swift recovery from the martial law incident, the dovish turn from the central bank and hopes of strong leadership from Lee after three previous presidents who, for one reason or another, were not supportive of the stock market.
Historically, it is not unusual for the stock market to rise on hopes that the incoming president will boost the economy. However, China's MIC2025 took 10 years before DeepSeek had its unexpected and spectacular introduction. Korea's pursuit of tech ascendency in these transformational times will take more than a few policy declarations. As we have seen from China, focus should be on policy action built to sustain well beyond a single-term presidency.
Peter S. Kim is a managing director at KB Securities. The views expressed in this article is his own.