Stock Trading and Other Things

Cushion against market s raw power

Summary: News Analysis The government says new regulations aren t designed to control the value of the won but to reduce the volatility of foreign capitalThe Korean currency has been violently pulled this way and that over the past two months with escalating inter Korean tension after the sinking of the warship and the debt crisis originating in Greece Massive fluctuations in the foreign exchange market were blamed on deteriorated investor sentiment driven by heightened geopolitical risk and the recurring fiscal crisis in Europe In other words foreign investors fled as uncertainties encroached on the stock market When foreigners sell stock share prices drop which leads to a rise in the exchange rate and an attendant weakening of the local currency Korea has been referred to as a small open economy which usually refers to the country s heavy reliance on exports The Korean economy s export to gross domestic product ratio last year was relatively high at 82 4 percent compared to 22 3 percent in Japan 18 7 percent for the United States and 45 percent for China in the same period One researcher from the Korea Institute for International Economic Policy commented In the long term the ratio of over reliance should be reduced while domestic demand is enhanced However being a small open economy has another implication capital flows out of the country quickly in times of crisis Korea is especially well known as a country with a relatively developed transaction and payment infrastructure and high liquidity compared to other emerging economies actively drawing foreign capital into the market However the local financial market has been vulnerable to external shocks since the Asian financial crisis in the late 1990s The Korean government opened the local bond market to other countries in December 1997 and the stock market in July 1998 in return for the International Monetary Fund s fiscal support In the following years ending in 2001 the foreign exchange market underwent a gradual opening process Foreign investors were finally able to trade local stocks bonds and currency As a result foreign funds flooded into Korea accounting for around 40 percent of the local stock market at their peak The new investment had benefits helping local companies such as Samsung Electronics and Hyundai Motor become global players However at the same time the market opening increased volatility in both stock prices and the exchange rate Some Korean experts even think the IMF measures went too far The opening of the local stock market to other countries since the Asian financial crisis brought foreigners too much influence on the domestic financial market which has started to show a phenomenon called counter coupling in which the stock market rises while the exchange rate falls said Professor Lim Byung jin at Yeungnam University The primary reason behind the massive fluctuations derives from the fact that Korea uses a local currency not an international one No big problems would occur if we were to use an international currency even in a small open economy said Korea Capital Market Institute researcher Lee In hyung He added that it was inevitable that Korea would face a huge impact from flow of foreign capital given that the won is a local currency not heavily traded on the global market To ease fluctuations in local finance authorities have recently developed measures to restrict foreign capital flow into Korea The government announced the new regulations on forward trading on June 13 Under the new measures the government will limit currency forwards by domestic banks to 50 percent of their equity capital and restrict foreign banks positions to 250 percent Institutions will also be given a grace period of three months to adjust their existing forward positions and can maintain their existing transactions for up to two years in case they exceed the ceiling The government has also decided to curb derivative trading in the local currency including cross currency swaps and non deliverable forwards Foreign currency loans will only be allowed for overseas use The new regulations will take effect starting in October Korea s recent decision restricting foreign capital flow including forward trading will have wide reaching effects on the local market weakening the won s value in the short term as United States dollars flood out of the country In fact the local currency hit the 1 270 won mark against the dollar during trading on June 10 when the rumors about the government s new regulations were spreading It was the first time the currency had hit that level since 25 days earlier when the country was faced with heightened inter Korean tension due to the news of a North Korean naval attack However financial authorities still pushed ahead with the new measures judging that uncertainty and instability in the foreign exchange market should be eased through controlling excessive capital flow in both directions The reason for the new rules is to prevent large capital outflow in times of crisis In good times a large amount of foreign capital flows into the country but it rushes back out when storms drift across the horizon For example around $21 4 billion in foreign capital flowed out of the country during the Asian financial crisis in 1997 while capital built up again from 1998 to 2004 when the stock and foreign exchange markets were liberalized In fact channels of foreign capital inflow vary According to the Ministry of Strategy and Finance capital flow into Korea through the stock market was estimated at $280 billion while $60 billion and $150 billion came into Korea through the bond and leverage markets respectively in 2010 as of the beginning of June Meanwhile short term foreign currency borrowing began to surge from 2005 to 2008 with shipbuilders and asset management firms expanding currency forwards to hedge against exchange risks But when the global financial crisis worsened after the collapse of Lehman Brothers in September 2008 $69 5 billion worth of foreign capital eroded away in the following three months The amount that slipped out of the country in that time accounted for 30 percent of the total foreign net inflow between 1998 and 2008 $221 9 billion As the domestic market suffered from outflows of foreign capital in 2008 the local currency against the U S dollar weakened touching the 1 500 mark for the first time since the Asian financial crisis The flight of foreign capital caused suffering not only for importers but also for the real economy raising the possibility of inflation and worsening unemployment Still there was one sector that benefited foreign banks operating in Korea whose local units saw net profits of 2 2 trillion won in 2008 plus around 23 5 trillion won in profits through futures trading Those lopsided consequences are what provoked the government to look into the structure of the foreign exchange market where foreign run banks in Korea earn gains with little risks while the country suffers from sudden outflows of foreign capital Financial authorities have been aware of the severity of the problem of foreign capital s influence over the domestic finance market for some time Korea is a small open economy in that the government cares deeply about the local market which is hugely influenced by inflows and outflows of foreign capital even small amounts said Financial Supervisory Service governor Kim Jong chang a few weeks before the government announced the new regulations on forward trading Chairman of the Financial Services Commission Chin Dong soo also previously expressed his concern saying that the foreign exchange market brought systemic risk to the Korean market Proponents of the measures argue that regulating capital movement is a global trend but critics have raised concerns about whether these plans could stifle the natural movement of capital and even encourage speculation In the mid to long term the new regulations are expected to stabilize the foreign exchange market and foreign banks operating in Korea will actually experience higher capital adequacy ratios said researcher Kim Jae eun at Hyundai Securities However in the short term it will cause the weakening of the won against the dollar while outflows of capital are also inevitable Another analyst at Woori Futures said Uncertainty can be seen in the swap market but fluctuations will be limited since the government announced that it is going to expand liquidity supply Overall analysts forecast the introduction of the new restriction on capital flows will influence the local currency against the dollar However they believe fluctuations on the foreign exchange market will end quickly Financial authorities also insisted that the new measures are not designed to control the won dollar exchange rate but to ease volatility on the financial market A day after the official announcement on the new regulations was made the local currency actually strengthened against the dollar by around 2 percent from the previous trading day to close at 1 222 2 won Fluctuations in the exchange rate would be seen while the rate is on a downward trend strengthening at a slow pace considering uncertainties surrounding the euro zone countries still remain said Korea Exchange Bank researcher Suh Jung hoon Some market participants ask whether it is the proper time to announce such measures with the Cheonan and European debt crises still ongoing However financial authorities believe Korea can t keep putting off ensuring the safety of its market considering capital is highly likely to flow into the country when the global economy enters a full recovery stage In other words the government says it needs to start pre emptive measures in preparation for sudden capital shifts in the future It remains to be seen whether the latest restrictions imposed on capital flow can really change the structure of the local financial market so that it is less sensitive to shifts of foreign capital But experts in related industries strongly believe that some problems surrounding foreign currency liquidity driven by sudden and excessive capital flows in times of crisis will ease Furthermore the government has opened the door to a possible adjustment or supplement of the recent measures after the G 20 Summit takes place in November So change is still as always possible By Jung Jae yoon jyj222 joongang co kr Copyrights ? JoongangIlbo Joins com All rights reserved News Analysis The government says new regulations aren t designed to control the value of the won but to reduce the volatility of foreign capitalThe Korean currency has been violently pulled this way and that over the past two months with escalating inter Korean tension after the sinking of the warship and the debt crisis originating in Greece Massive fluctuations in the foreign exchange market were blamed on deteriorated investor sentiment driven by heightened geopolitical risk and the recurring fiscal crisis in Europe In other words foreign investors fled as uncertainties encroached on the stock market When foreigners sell stock share prices drop which leads to a rise in the exchange rate and an attendant weakening of the local currency Korea has been referred to as a small open economy which usually refers to the country s heavy reliance on exports The Korean economy s export to gross domestic product ratio last year was relatively high at 82 4 percent compared to 22 3 percent in Japan 18 7 percent for the United States and 45 percent for China in the same period One researcher from the Korea Institute for International Economic Policy commented In the long term the ratio of over reliance should be reduced while domestic demand is enhanced However being a small open economy has another implication capital flows out of the country quickly in times of crisis Korea is especially well known as a country with a relatively developed transaction and payment infrastructure and high liquidity compared to other emerging economies actively drawing foreign capital into the market However the local financial market has been vulnerable to external shocks since the Asian financial crisis in the late 1990s The Korean government opened the local bond market to other countries in December 1997 and the stock market in July 1998 in return for the International Monetary Fund s fiscal support In the following years ending in 2001 the foreign exchange market underwent a gradual opening process Foreign investors were finally able to trade local stocks bonds and currency As a result foreign funds flooded into Korea accounting for around 40 percent of the local stock market at their peak The new investment had benefits helping local companies such as Samsung Electronics and Hyundai Motor become global players However at the same time the market opening increased volatility in both stock prices and the exchange rate Some Korean experts even think the IMF measures went too far The opening of the local stock market to other countries since the Asian financial crisis brought foreigners too much influence on the domestic financial market which has started to show a phenomenon called counter coupling in which the stock market rises while the exchange rate falls said Professor Lim Byung jin at Yeungnam University The primary reason behind the massive fluctuations derives from the fact that Korea uses a local currency not an international one No big problems would occur if we were to use an international currency even in a small open economy said Korea Capital Market Institute researcher Lee In hyung He added that it was inevitable that Korea would face a huge impact from flow of foreign capital given that the won is a local currency not heavily traded on the global market To ease fluctuations in local finance authorities have recently developed measures to restrict foreign capital flow into Korea The government announced the new regulations on forward trading on June 13 Under the new measures the government will limit currency forwards by domestic banks to 50 percent of their equity capital and restrict foreign banks positions to 250 percent Institutions will also be given a grace period of three months to adjust their existing forward positions and can maintain their existing transactions for up to two years in case they exceed the ceiling The government has also decided to curb derivative trading in the local currency including cross currency swaps and non deliverable forwards Foreign currency loans will only be allowed for overseas use The new regulations will take effect starting in October Korea s recent decision restricting foreign capital flow including forward trading will have wide reaching effects on the local market weakening the won s value in the short term as United States dollars flood out of the country In fact the local currency hit the 1 270 won mark against the dollar during trading on June 10 when the rumors about the government s new regulations were spreading It was the first time the currency had hit that level since 25 days earlier when the country was faced with heightened inter Korean tension due to the news of a North Korean naval attack However financial authorities still pushed ahead with the new measures judging that uncertainty and instability in the foreign exchange market should be eased through controlling excessive capital flow in both directions The reason for the new rules is to prevent large capital outflow in times of crisis In good times a large amount of foreign capital flows into the country but it rushes back out when storms drift across the horizon For example around $21 4 billion in foreign capital flowed out of the country during the Asian financial crisis in 1997 while capital built up again from 1998 to 2004 when the stock and foreign exchange markets were liberalized In fact channels of foreign capital inflow vary According to the Ministry of Strategy and Finance capital flow into Korea through the stock market was estimated at $280 billion while $60 billion and $150 billion came into Korea through the bond and leverage markets respectively in 2010 as of the beginning of June Meanwhile short term foreign currency borrowing began to surge from 2005 to 2008 with shipbuilders and asset management firms expanding currency forwards to hedge against exchange risks But when the global financial crisis worsened after the collapse of Lehman Brothers in September 2008 $69 5 billion worth of foreign capital eroded away in the following three months The amount that slipped out of the country in that time accounted for 30 percent of the total foreign net inflow between 1998 and 2008 $221 9 billion As the domestic market suffered from outflows of foreign capital in 2008 the local currency against the U S dollar weakened touching the 1 500 mark for the first time since the Asian financial crisis The flight of foreign capital caused suffering not only for importers but also for the real economy raising the possibility of inflation and worsening unemployment Still there was one sector that benefited foreign banks operating in Korea whose local units saw net profits of 2 2 trillion won in 2008 plus around 23 5 trillion won in profits through futures trading Those lopsided consequences are what provoked the government to look into the structure of the foreign exchange market where foreign run banks in Korea earn gains with little risks while the country suffers from sudden outflows of foreign capital Financial authorities have been aware of the severity of the problem of foreign capital s influence over the domestic finance market for some time Korea is a small open economy in that the government cares deeply about the local market which is hugely influenced by inflows and outflows of foreign capital even small amounts said Financial Supervisory Service governor Kim Jong chang a few weeks before the government announced the new regulations on forward trading Chairman of the Financial Services Commission Chin Dong soo also previously expressed his concern saying that the foreign exchange market brought systemic risk to the Korean market Proponents of the measures argue that regulating capital movement is a global trend but critics have raised concerns about whether these plans could stifle the natural movement of capital and even encourage speculation In the mid to long term the new regulations are expected to stabilize the foreign exchange market and foreign banks operating in Korea will actually experience higher capital adequacy ratios said researcher Kim Jae eun at Hyundai Securities However in the short term it will cause the weakening of the won against the dollar while outflows of capital are also inevitable Another analyst at Woori Futures said Uncertainty can be seen in the swap market but fluctuations will be limited since the government announced that it is going to expand liquidity supply Overall analysts forecast the introduction of the new restriction on capital flows will influence the local currency against the dollar However they believe fluctuations on the foreign exchange market will end quickly Financial authorities also insisted that the new measures are not designed to control the won dollar exchange rate but to ease volatility on the financial market A day after the official announcement on the new regulations was made the local currency actually strengthened against the dollar by around 2 percent from the previous trading day to close at 1 222 2 won Fluctuations in the exchange rate would be seen while the rate is on a downward trend strengthening at a slow pace considering uncertainties surrounding the euro zone countries still remain said Korea Exchange Bank researcher Suh Jung hoon Some market participants ask whether it is the proper time to announce such measures with the Cheonan and European debt crises still ongoing However financial authorities believe Korea can t keep putting off ensuring the safety of its market considering capital is highly likely to flow into the country when the global economy enters a full recovery stage In other words the government says it needs to start pre emptive measures in preparation for sudden capital shifts in the future It remains to be seen whether the latest restrictions imposed on capital flow can really change the structure of the local financial market so that it is less sensitive to shifts of foreign capital But experts in related industries strongly believe that some problems surrounding foreign currency liquidity driven by sudden and excessive capital flows in times of crisis will ease Furthermore the government has opened the door to a possible adjustment or supplement of the recent measures after the G 20 Summit takes place in November So change is still as always possible By Jung Jae yoon jyj222 joongang co kr Copyrights ? JoongangIlbo Joins com All rights reserved

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