Foreign investors dump stocks

By Na Jeong-ju

Foreign investors are scrambling for an exit from Korea, sending a shudder through the nation’s financial markets, after U.S. Federal Reserve Chairman Ben Bernanke hinted at tapering of a monetary stimulus later this year.

On Friday, the benchmark KOSPI shed 27.66 points, or 1.49 percent, to end at 1,822.83 _ the lowest level in about 10 months.

The Korean won continued to lose strength against dollar, ending at 1,157.7, up 12 won from a day earlier and the lowest level in 11 months.

Interest rates on the benchmark three-year government bonds also hit a one-year high of 2.94 percent, up 0.13 percentage points from a day earlier.

Over the past three weeks, foreign holdings of local stocks and bonds have shrunk by 31 trillion won to 481 trillion won, accounting for about 31 percent of the total stock ownership here. Friday alone, foreigners dumped Korean shares worth 754 billion won.

According to the Financial Supervisory Service (FSS), foreign capital inflow since the beginning of the Fed’s stimulus policy in 2008 had reached 304 trillion won ($260 billion), and of that amount, 114 trillion won came from the United States.

The combined value of local stocks and bonds held by foreigners stood at 512.7 trillion won as of the end of May, compared to 208.2 trillion won at the end of 2008.

“The figures suggest there could be an exodus of foreign funds as there was when the country was hit by the Asian financial crisis in late 1997,” an FSS official said. “But that’s just the worst-case scenario that is unlikely to happen. The U.S. exit strategy will have a limited impact because the Korean economy is much stronger now.”

During the financial crisis, foreigners withdrew investments worth about 156 trillion won over one year. Their stock holdings were halved to 170.7 trillion won from 325.4 trillion won, and the benchmark KOSPI plunged 40.7 percent over the period.

In a bid to calm investors, Finance Minister Hyun Oh-seok said the government will take countermeasures immediately, if necessary.

“Bernanke’s remarks have eased uncertainties about when the U.S. will drop its bond-buying program. That means the U.S. economy is recovering, which is positive for us. However, massive capital outflow is occurring in emerging markets,” Hyun said at a meeting of economic policymakers. “The capital markets could become more volatile. We should take steps immediately if the panicky trading doesn’t stop.”

Hyun assured market participants that Korea’s current account surplus is continuing and economic fundamentals remain solid. The country recorded a current account surplus for 15 months in a row in April with the surplus totaling $13.9 billion in the first four months of this year.

He said the ministry will unveil economic policy goals for the second half of this year on Thursday.

“The top policy priority will be getting the economy out of a low-growth trap. We will also set up countermeasures against the possible exit from quantitative easing by the U.S.,” the minister said.

Financial Services Commission (FSC) Chairman Shin Je-yoon also indicated that the government may take action next week to stabilize the markets.

“I’m closely watching how the U.S. markets are reacting to the Fed’s decision. If investor sentiment doesn’t improve, we may have to step in to the financial market here,” Shin told reporters.

The FSC said it is monitoring cross-border capital movements along with the FSS.

Bernanke likened the move to “letting up a bit on the gas pedal as the car picks up speed, not pressing on the brake.” However, emerging markets around the world are feeling the effects of a sudden asset repositioning by global investors. What is making investors more jittery is the slowing growth of the Chinese economy.