Korea's Bourses: Stock Markets or Casinos?

      March 03, 2009 09:07

      Foreigners were net sellers of more than W400 billion (US$1=W1,574) worth of shares on the Korea Exchange on Monday. It was the largest amount so far this year. As a result, the Korea Composite Stock Price Index fell more than 44 points. As foreigners exited the local market after exchanging the money they received from selling domestic stocks into U.S. dollars, the Korean currency plunged W36 to W1,570 per dollar.

      Just a month ago, foreigners demonstrated a voracious appetite for Korean stocks. During nine trading sessions, from Jan. 28 until Feb. 9, foreigners were net buyers of more than W1.6 trillion worth of Korean shares. But starting on Feb. 10, foreigners sold Korean stocks for 15 consecutive days, becoming net sellers of almost W2.4 trillion worth of stocks. Experts believe foreigners are using the Korea Exchange to profit from currency speculation.

      From the standpoint of foreign investors, it does not matter if the values of their shares rise or fall. They can easily make exchange-rate profits if the Korean won strengthens after they purchased domestic stocks. This is why foreigners have cashed out of stock markets in emerging economies, including Korea, when the local currencies were expected to weaken. And those currencies are weakening further as foreigners exchange them back into dollars when exiting those markets. Foreigners have used the Korea Exchange like a casino to bet on currency. Korea's stock and foreign exchange markets are being rattled by these speculative dealings.

      The value of the won has depreciated 20 percent against the dollar so far this year, much more than Taiwan (-6.4 percent), Singapore (-6.9 percent) and Thailand (-3.2 percent). Due to the steep weakening of the Korean won against the U.S. currency, the KOSPI has fallen to the 380-point level on a dollar-based scale. Kim Sung-bong, a researcher at Samsung Economic Research Institute, said Korean stocks are very low priced from the perspective of foreign investors, meaning more speculative money could enter the Korean market.

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