Korea liberalizes stock mart in concession to join OECD

By Hendarsyah Tarmizi

SEOUL (JP): The South Korean government is liberalizing its capital market as part of its concessions to obtain full membership, in 1996, to the Organization for Economic Cooperation and Development (OECD), the Paris-based club of industrialized nations.

The deregulation is part of a three-stage financial reform to be taken by the South Korean government beginning next year and it is expected the country's banking and capital market will be completely open to foreigners by 1999, the last stage of the reform.

At the initial step, the foreign equity ownership limit will be raised from 10 percent to 12 percent in December and to 15 percent next year, president of the Korea Stock Exchange, Hong In Kie told The Jakarta Post.

"We hope that by 1999, foreigners will be able to buy as much stocks as they want," he said.

Hong said the deregulation measure will cover not only issues on the foreign equity ownership limit but also other trading restrictions such as the price spread limit, which is at present fixed at four percent for each trading day.

A full disclosure requirement and the trading surveillance will be also improved to meet international standards, while improving the share clearing and settlement systems, he said.

"The procedure imposed on foreign securities companies to operate in Korea will also be relaxed," he said.

Foreign securities companies are allowed to establish branch offices and joint venture securities companies to engage in any securities business in Korea after receiving approval from the Ministry of Finance. However, the procedure to obtain the operational license is still complicated.

Last year, Daiwa Securities, one of the biggest securities firm in Japan, opened a branch in Seoul, increasing the number of foreign securities firms' branches to eight.

KSE, the only stock market in South Korea, was established in 1956. There are 693 listed companies at present, with a market capitalization of US$198.2 billion. The daily turnover reaches $0.9 billion.

Hong acknowledged that, like in other Asian stock exchanges, foreign investors remain the dominant factor in trading activities despite the increase in the number of local buyers.

Increase

The foreign investors' strong response is reflected by the continued increase in their equity investment in this market. The influx of foreign funds into the market reached $7.64 billion last year, an increase of 178.8 percent from $2.74 billion in the previous year. They remitted $1.94 billion, leaving a net balance of $5.7 billion as at the end of 1993.

Hong said the value of stocks bought by foreigners totaled $9.5 billion as of last month, with American institutions holding around 30 percent of the total, British investors 28 percent and other foreign investors 42 percent.

The market's Korea Composite Stock Price Index (KOSPI) continued strengthening in line with the increase in the influx of the foreign funds into the market. During the first 10 months of this year, the index booked a gain of almost 25 percent to reach 1,113.29 at the end of last month, as compared to 899.32 at the beginning of this year.

Local economists strongly support the government's capital market deregulation program, saying that the widening of the foreign equity ownership limit would better equip the stock market to play as the "safety valve" of the country's monetary system.

A senior fellow of the Korean Development Institute, Sung Hee Jwa said the increase in the influx of foreign funds into the capital market could be used to balance the position of the country's current account, which often recorded a deficit partly as a consequence of the country's growing overseas investments.

Korea's current account recorded a deficit of $2.7 billion in the first semester of this year, following a surplus of $4.5 billion last year, the only surplus recorded in the last four years. The current account deficit hit a level of $8.7 billion in 1991 and declined to $4.5 billion in 1992.