Retail investors become key issue ahead of Korea's general elections

A person walks past an electronic board at the Korea Exchange in Seoul, Wednesday. Yonhap

Prominent in the discussions leading up to the general elections this April are political promises targeting the nation's 14 million retail investors, seeking to attract their support.

Following last year's introduction of a temporary ban on short selling and the reduced capital gains taxes for large shareholders, the government and the ruling party reaffirmed their commitment to further measures that will enhance and safeguard the earnings of retail investors.

At a town hall meeting at the Korea Exchange on Wednesday, President Yoon Suk Yeol pledged to reform the "excessive tax system that hinders the development of the stock market," noting its "detrimental impact" on Korea's middle class.

During the meeting, the government announced its plan to lower taxes on interest and dividend income through the Individual Savings Account (ISA) product, and to proceed with the planned abolition of the financial investment income tax. Additionally, the securities transaction tax is expected to be further reduced to 0.15 percent next year, from 0.18 percent this year.

These measures, if implemented, will lower all three categories of taxes imposed on stock market investments.

In various political arenas, there is a push for policies favoring retail investors, framed under the pretext of addressing the "Korea discount," a term used to depict the lower valuation of local shares compared to their global counterparts.

The main opposition Democratic Party of Korea (DPK) is reportedly formulating policies specifically for retail investors, which are expected to be unveiled shortly before the general election in April. Additionally, the newly formed party by Lee Jun-seok announced a series of policies on Monday, such as the obligation to publicly tender 100 percent of shares when acquiring control rights.

President Yoon Suk Yeol speaks during a town hall meeting at the Korea Exchange in Seoul, Wednesday. Yonhap

This is not the first instance of policies targeting retail investors being announced in the run-up to an election.

Why are issues that retail investors have consistently raised, but previously ignored by politicians, now being highlighted as election promises?

The reason is the significant increase in the number of retail investors. According to the Korea Securities Depository, the number of retail investors grew from 5.6 million in 2018 to 14.2 million in 2022, a surge largely attributed to the bullish market that occurred during the COVID-19 pandemic. This number even exceeds the total population of Gyeonggi Province, which stood at 13.6 million in 2022.

However, these "goodwill" policies are also being criticized for potentially disrupting the capital market.

"Is it justifiable to make unilateral announcements on matters that require careful consideration and societal discourse, without any preliminary dialogue?" Han Min-soo, a spokesperson for the DPK said.

Particularly, since many of these pledges require legal amendments, some argue that they can only be realized if the ruling party succeeds in the upcoming general elections.

The mounting fiscal deficit should be taken into account as well. It is estimated that the abolition of the financial investment income tax could result in a loss of approximately 1 trillion won in tax revenue annually.

Critics also contend that the benefits of government-driven measures to artificially boost the stock market are short-lived. The domestic stock market, already grappling with challenges since the beginning of the year, experienced its most significant drop in three months on Wednesday.

"The most critical factor is the outlook on Korean corporations and the economy," Ha Joon-kyung, professor of economics at Hanyang University, said.