'Dividends Alone Worth 60 Trillion' Earning Foreign Currency But... "Headache Due to Korean Investors in Foreign Stocks"

The government has mixed feelings about Korean investors in foreign stocks. These investors, who stay up all night buying foreign stocks, are making significant contributions to the fundamentals of the Korean economy. Last year, the dividends earned from foreign stocks by these investors exceeded 60 trillion won. However, there's a growing perception that they are increasing volatility in the foreign exchange market. This analysis stems from the fact that they've pushed up the won-dollar exchange rate by converting won to dollars to purchase foreign stocks.

The government has presented several measures to alleviate the foreign exchange market instability created by these investors. It plans to broaden the path for Korean companies to raise foreign currency for domestic facility investments. It has also introduced measures to encourage Korean investors to turn their attention to the Korean stock market.

On the 9th, the Ministry of Economy and Finance, Financial Services Commission, Bank of Korea, and Financial Supervisory Service announced 'Additional Measures to Improve Foreign Exchange Supply and Demand' containing these details. This is a response card put forward as the won-dollar exchange rate soared due to increased dollar demand from Korean investors in foreign stocks. Foreign securities held by individuals increased by about 52% to $158.7 billion by the end of 2024, compared to the end of the previous year ($104.2 billion).

The government has maintained an autonomous stance regarding the outflow of domestic won funds to overseas markets. However, it has been strict about the inflow of foreign funds into the country. This was due to concerns that these foreign funds could precipitate a foreign exchange crisis if withdrawn all at once. But with a significant improvement in domestic external soundness and a large surge in exchange rates due to supply-demand imbalances in the domestic foreign exchange market, the government has decided to substantially revise regulations on bringing foreign funds into the country.

The government has decided to allow foreign financial companies to purchase Kimchi bonds (foreign currency-denominated bonds issued in the domestic capital market) for domestic investment by Korean companies. The exchange rate can stabilize as Korean companies convert foreign currency raised through Kimchi bonds into won. It also allowed domestic companies to borrow foreign currency funds from overseas branches of domestic banks for domestic facility investments. This is also a measure to stabilize the foreign exchange market by expanding the demand for converting foreign currency to won.

Measures to increase the scale of corporate foreign exchange product transactions by financial companies were also introduced. The risk hedge ratio for financial companies' large corporations (the value obtained by dividing the amount of foreign exchange derivative transactions by the standard amount of physical transactions such as exports) will be expanded from 100% to 125%. This is interpreted as a measure to expand corporate foreign currency procurement.

Measures to induce domestic investment by Korean investors in foreign stocks were also presented. The government plans to consider raising the mandatory investment ratio of domestic stock-type funds and domestic stocks in the Individual Savings Account (ISA) for domestic investment above the legal limit (40%). In addition, it will re-promote tax support for value-up, including tax incentives to promote shareholder returns. This includes corporate tax credits for the amount of increased shareholder returns (exceeding 5% compared to the previous three years). The procedures for tax exemption applications for foreign investors' government bond investments will also be simplified.

Reporter Kim Ik-hwan lovepen@hankyung.com