Last week the Bank of Korea, Korea’s central bank, raised interest rates. Why, well for the usual innocuous reasons. As the Joongang notes
the Bank of Korea raised its benchmark interest rate for the second month in a row due to fears that rapid growth in money supply could be fueling both inflation and an asset bubble.
The Korean stock market’s reaction to this was pretty much as textbook as the BOK reasons for the rate increase. On Friday Korean stocks declined. Now the decline was rather large, but still totally within a range somebody would expect after recent gains (the KOSPI has been on quite a tear the past couple years).
So why I am mentioning this rather coma inducing boring series of events? Because the idiots that came out of the woodwork over the weekend to write in the newspapers on “why” the Korean stock market fell Friday. Now “why” do you think they said the market declined? The BOK rate increase? The inflation and asset bubble mentioned by the BOK? The fact the rate increase could decrease exports eventually in an export driven economy? Of course not, IT’S ALWAYS AMERICA’S FAULT!
What leads the Korea Times/Hankook Ilbo’s business news?
US Investors Most Active in Dumping Local Stocks
U.S. investors have led a recent selling spree of local stocks by foreigners on profit taking amid the bullish market run.
According to the securities industry Sunday, foreign equity investors have posted 7.5 trillion won in net selling since July 13, of which U.S.-based investors dumped shares worth 2.6 trillion won, outpacing other foreign nationals.
Note the statistics do not talk about “net” buying and selling, just sales. Further, the perspective is not, say, Koreans getting shares at a bargain from Americans, but the Americans are “dumping”, meaning to sell below your cost for the sole reason to drive down average cost, and normally reserved to described the activity of “bad actors”. Nice misuse of numbers and rhetoric to whip up anti-Americanism.
Meanwhile, the Dong-A Ilbo donates a massive amount of ink to speculate on how the US sub-prime mortgage market affected/will affect Korea’s stock market. After introducing the topic they note:
How far will the effects of the U.S. sub-prime mortgage loan rate on the world stock market go?… the Korean stock market… experienced a nosedive on August 10 caused by concerns over a global financial crisis.
Once again note the deft use of rhetoric in introducing the topics to link them, and let’s not forget the bold face lie that the decline was a “nosedive”. And then there was the fact the BOK increased rates, but I guess to the Mensa candidates writing on business at the Dong-A interest rates have no effect on the business sector.
You know many expats around me warned me to note the rise of anti-americanism in the press to coincide with the upcoming election. I once discounted that as paranoia, but in light of the above I may just have to reconsider.
18 Comments
Anyone who has invested in the Korean stock market, foreigner or Korean, sees this sort of thing all the time. They know it’s BS. It isn’t new. Remember the ‘IMF’?
As a commodities trader for many many years, I feel I might be able to contribute something here.
The Bank of Korea is run by idiots!!
Rather than allow the country to gradually adjust to a higher currency, via higher productivity, muted wage demands, they spend a fortune to supress the currency. They bought millions in US Treasuries that have plunged in value. About a year ago because the yield on treasuries was crap, they decided to invest (gamble) on securitized sub prime mortgages.
I very strongly suspect the BOK has been artificially inflating the KOSPI, via excess liquidity. They have done this due to the collapse of the housing market. Fundamentally Korea has learned NOTHING from the IMF crisis, it continues to artificially create bubbles, prop up unsound businesses.
The BOK does not allow the market to take its course. Look at free market economies such as Singapore, Hong Kong, Australia BOOMING!
The policies of the BOK are purely Chaebol driven. They are purely a wealth transfer. They create wealth for the incompetent, corrupt bastards, and losses that will be borne by the average Korean. Who will be blamed for those losses, foreigners (mostly Uncle Sam). P.S I am not American. The dumb ass Korean public will get duped again.
Even more incredible is that the Korean public, not only take it up the rear, but would rather do so willingly than change the system as Koreans would have to admit that the evil foreign devils are not the problem.
My wife is Asian, I come from a mixed background, so I do not believe that I am prejudiced, however I have to say, Koreans have been blinded by their nationalistic bullshit education, most (and I mean a hell of a lot) can’t think straight, this is why I don’t respect these people. Fools absolute fools.
The author of this post has misinterpreted the article.
The article said that, the United States leads FOREIGNERS in the net value of assets sold. It did not cite U.S. investors as the leading sellers amongst ALL investors. The Koreans hold most of the value in the KOSPI, so one would be hardpressed to say that this article blames Americans for the recent market correction. In fact, the article you posted does not even mention the recent market correction
Furthermore, I’m not so sure that this author understands the financial markets well. It’s plain common sense that financial markets are interconnected. As the 1997 Asian Financial crisis demonstrated, a collapse in one market can trigger corresponding collapses in others. In 1997, the origin of the collapse was Southeast Asia, If, this time, the collapse begins in the United States, the consequences will be far more dramatic.
But the effects of the subprime crisis are not limited to the realm of speculation. We are already witnessing the effects subprime rumors are triggering in market outside the United States. The recent worries over subprime mortgages in the United States triggered a recent decline in the Nikkei–and you can’t cite interest rates as a problem in the Nikkei because Japan’s central bank has not announced a rise in interest rates.
No one knows where the next market meltdown will start, but one can be sure that no matter where it starts, markets all over the world will be affected.
There is some truth in that smoke, I just think the Korean bank raising their interest rates just was incredibly bad timing (the global decline was triggered outside of Korea and would’ve affected Korea regardless of the bank’s actions)
What they did, however, aggravate the problem, I think.
Austin, just who, exactly, do you think you’re fooling here? You used to be a commodities trader? The reasoning and handling of facts displayed in your post suggests otherwise.
1. Austin, in 1997, Korea lacked foreign reserves. Korea lacked dollars. One of the reasons Korea has purchased so many U.S. treasuries since then is to avoid a liquidity trap. So your contention that Korea learned nothing from the IMF crisis is factually unsound.
2. You suspect that the BOK has been inflating the KOSPI via excess liquidity? Austin, the BOK has raised interest rates and the interest rate in Korea is higher than correponding interest rates in China and Japan. Austin, how exactly can an increase in interest rates lead to excess liquidity? Freshman economics classes teach that interest rates and liquidity are inversely related. (Sigh) Austin, you need to check the facts before you begin rambling.
3. You mentioned a collapse of the housing market in Korea…Austin, the price of housing has risen by 68% over the past four years and has declined by a mere 1% this year. Not a “collapse” by any measure. In fact, the government has been trying–unsuccessfully–to cool the housing market for the past few years. Anyone can see that higher interest rates are an attempt to tamp down overheated speculation in real estate.
There are many reasons to criticize the Bank of Korea, but if you’re going to criticize it, do yourself a favor and make sure your reasoning is sound first.
P.S. Most people in the know criticize the BOK for trying to depress the real estate bubble. Considering how the fall in real estate in Japan triggered corresponding collapses in the Nikkei, invesors and economics wring their hands at what a similar collapse in real estate prices might trigger in Korea. High interest rates are also cited as a contributor to the overvalued won, which actually hurt the Chaebol.
I stand by my comments. Yes liquidity is being pumped into the system. Interest rates may have risen, but that does not reduce the amount of money in the system, it merely increases the price of it. A huge amount of money has poured into Korea via the Yen carry trade. That is DEBT! That’s why banks call my wife everyday, offering to lend her money!
As for Korea needing FX reserves, this is true, but they don’t need the ridiculous amount that they have. Sending money overseas like the BOK does, merely serves to dampen domestic demand.
As for the housing market, there are a hell of a lot of vacant apartments out there.
Western banking practices are much harsher, you can’t pay, we foreclose. In Korea, you can’t pay, we give you more money!. In Korea the policy is not to allow natural economic cycles to occur. These cycles are cleansing. Domestic demand drops, solution, give everyone a credit card. The true state of the property market is hidden. Years ago people queued to buy apartments. Now every other day, someone sticks advertising on my door offering apartments for sale. Why, the market is flat!
YoungRocco, if the Korean economy isn’t flat on its back within the next 2 years, I’ll buy you a magnum of French champagne! It’s a house a cards waiting to fall.
Austin, I believe many fund managers (international and Korean) and thier analysts will beg to differ with your negative sentiment on the Korean market.
Speaking of foreign investment,
The amount of money Koreans are investing overseas has skyrocketed in the past 6 months since capital gains tax was removed from onshore based internationally invested mutual funds. (however if you invest directly into an offshore fund you will pay the tax which has affected many international asset managers in Korea).
In the fund management industry,
Korean assets in offshore funds are US $14.4 billion as of June 30 and US $1.8 billion in onshore international equity funds as at then end of July. - This figure will no doubtly increase over the coming months.
While Korean investors may not yet be as sophisticated as some, they do know to diversify their assets and can cash in on internationally performing markets if the KOSPI starts seeing red figures.
Correction, the assets Koreans hold in onshore internationally invested funds is just over US $34 billion at the end of July. (not $1.8 billion)
“As the 1997 Asian Financial crisis demonstrated, a collapse in one market can trigger corresponding collapses in others. In 1997, the origin of the collapse was Southeast Asia, ”
Silly you. Don’t you know that it was the evil-American-backed IMF that caused the financial crisis of ‘97?
Ah, another eg of how Korea levels the playing field. Hubba Hubba!
Champagne *is* French, no need to qualify that word
Any bubbly wine made outside the French region of Champagne is just sparkling wine.
Korea had a $16b trade surplus last year, that’s the difference between exports and imports. The exports earned dollars, the dollars were brought back here and exchanged for won. That’s an increase in won liquidity. Extra liquidity causes inflation, no debate about that. The liquidity can be sterilized by the government buying up the won through issuance of bonds, but bonds have to pay interest, so there’s a limit to how much the government is willing to sterilize. Hence the loosened regulations allowing Koreans to invest more money overseas (including buying real estate). It gets the government off the hook to sterilize all the dollars. There’s no story here, this has been going on all over Asia for years.
The world’s stock markets had a bad few days last week, all on account of US sub-primes. Korea was included. There’s no story here, either.
America invests money on behalf of the whole world. Public funds, private funds, governments and individuals give money to Morgan Stanley, Goldman Sachs, Vanguard and others to invest on their behalf. Saying that the US was the big seller is misleading, to be sure, but that’s the Korean media as usual, no story here.
Korean household debt is at an all-time high, almost 40mil won per household. Biggest growth has come from people taking mortgages to invest in real estate. Real estate hasn’t collapsed, but it has leveled off (see the link in the previoius thread about the “pyung”). The BOK wants that trend to stop, so it raised rates to slow down household borrowing, mindful of the 2002-2003 credit card debacle. But the BOK is “run by idiots”, and this move is of course too little too late. The world’s financial markets have got much bigger problems to work through now than the mortgage gluttony of Korea’s amateur property speculators. No story here, either.
August being a slow news time, let’s blame America for something. Now THAT’s a story.
I think in this instance, dumping just means getting rid of a lot in a short period of time, rather than the import/export definition of selling below cost.
Austin, you’ve contradicted yourself.
First, you claimed that Koreans want to avoid taking responsibility for the financial system here in Korea. In essence, you claimed that foreigners have little to do with financial issues in Korea. However, you then turnaround and claim that excess liquidity in Korea is caused by the Yen Carry trade, in essence, pinning the problem of liquidity on low interest rates set by Japan’s central bank. You went from blaming the Bank of Korea to blaming the Bank of Japan in one post. You’re obviously confused.
In your newest litany of nonsense, you’ve also claimed that Korea has too much American currency. Austin, Austin, Austin, you still don’t get it do you? Korea most certainly needs American currency if it is to avoid a run on its currency by speculators. Korea also needs to stockpile this currency in case of a stampede toward lower risk assets. i.e. dollar denominated treauries. Last, but not least, because the Yen and Yuan are so cheap, U.S. currency is needed to maintain export price competitiveness. Again, this is all econ 101, but of course, I wouldn’t expect you to understand.
Empty apartments, Austin? That’s the whole point! That’s the reason the Government is trying to tamper down speculation. The government knows that housing prices are not indicative of demand for living space, but are driven by speculation. This is exactly why the government is raising interest rates.
There are a variety of other problems in your post, Austin:
1. You’ve fantasized a conspiracy between the Chaebol and the Bank of Korea to provide liquidity in the market, but then you attribute excess liquidity to the Bank of Japan.
2. You confuse the Bank of Korea with secondary Banks. (Secondary banks owned by the Chaebol, not the Bank of Korea, are commonly cited as responsible for excessive loans to cheabols and the collosal amount of debt owed by the Chaebol at the end of the 1997 Asian meltdown.)
3. You confuse a flat home market with a collapse of the housing market.
4. You claim that high interest rates do not effect the money supply. (Everyone knows that interest rates and the money supply are inversely related, Austin. Well, everyone except you)
5. You claim that market in Korea will “collapse” in two years, even though Korea recently achieved record exports. (With an overvalued currency to boot!)
6. You’ve changed your argument from, “Korea hasn’t learned anything from 1997 and blames foreigners too much” to “The Korean economy will collapse in two years!” Austin, stick to your thesis. You can’t change it all willy-nilly.
Austin, you don’t know squat about market principles.
Hey, Baekdu, where did you get your figures?
YoungRocco2,
Source is AMAK - Asset Management Association of Korea.
YoungRocco2,
Source is AMAK - Asset Management Association of Korea.
YoungRocco2,
Source is AMAK - Asset Management Association of Korea/자산운용협회