BOK chief warns of growing economic uncertainties

Lee Ju-yeol

Escalating US-China trade war poses threat to Korean economy

By Lee Kyung-min

The Bank of Korea (BOK) will beef up its monitoring of the domestic financial market amid growing uncertainties associated with the U.S.-China trade talks, vowing to take all possible steps to stabilize the country's foreign exchange and stock markets, the BOK chief said Friday.

“Recently, uncertainties involving the U.S.-China trade dispute have increased to a great degree over the U.S.' decision to slap additional tariffs on Chinese goods,” Governor Lee Ju-yeol said according to a press statement issued by the bank.

“The situation requires further monitoring while expectations still remain that the two countries will continue efforts to resolve the issue.”

The remarks seeking to downplay the ongoing financial market developments came at an emergency meeting of key BOK department heads early in the morning soon after both the local and the U.S. market tumbled.

The S&P 500 ended at 2,870.72, May 9 (local time), down 8.70 points, or 0.3 percent from a day earlier.

The Dow Jones industrial average also closing at 25,828.36, losing 138.97 points, or 0.5 percent from the previous day.

The Nasdaq composite also fell 32.73 points, or 0.4 percent to 7,910.59.

Korea's benchmark KOSPI stock index closed at 2,102.01 points, Thursday, losing 66 points, or 3.04 percent, largely driven by foreign sell-offs.

It was the biggest daily loss in seven months since Oct. 11 2018, when it lost 89.94 points, or 4.44 percent.

The foreign investment was put into safer assets, leading to a rise in government bond prices and a corresponding fall in their yield.

The 3-year government bond yield fell 0.9 basis points to 1.708 percent, while the benchmark 10-year yield fell by 1.7 basis points to 1.861 percent.

The Korean won also weakened, closing at 1,179.80 won against the dollar the same day, down 10.4 won from a day earlier.

This was the lowest since Jan. 19, 2017 when it stood at 1,177.60 won.

Fears on the trade tension further spiked Friday.

The benchmark KOSPI fell sharply to as low as 2,090.39 around 1 p.m. Friday, immediately after news reports that President Donald Trump had intensified the trade conflict by increasing tariffs on $200 billion of Chinese goods.

In response, China's commerce ministry said countermeasures against the move will be taken, adding it “deeply regrets” the turn of events.

The local financial market is likely to see continued deterioration for the time being, given the rising uncertainty over the trade dispute, according to an economist.

“The trade dispute will see no tangible resolution because it really is about power struggle over intellectual property,” said Sung Tae-yoon at Yonsei University.

“The dispute may see a truce on the surface, but unless the core, deeper issue concerning protecting high-tech industries gets resolved, the two sides will continue to lock horns one way or another.”

Sung added that the market volatility here will increase, compounded by fast falling corporate profitability, soaring labor costs and government-led economic policies.

“Foreign investors have and will continue to flee the financial market because of a significant drop in profitability of Korean firms, not only chip makers but also other major conglomerates,” he said.

“The shorter workweek and rise in minimum wage ― the government's two key economic policies ― continue to hurt labor productivity, and foreign investors know the situation will not see any major turnaround over the short term.”