[Yoo Choon-sik] What foreign investors want from South Korea

One of the most frequently discussed phrases this year in South Korea regarding the economy and financial markets was "Korea Discount,’" and the government has made addressing this issue one of its top economic policy goals. In fact, President Yoon Suk Yeol has presided over high-profile meetings to discuss ways to address the issue, and relevant government agencies have either taken steps or promised to do so.

The phrase "Korea Discount" refers to the local stock market’s valuation disparity, with companies trading on the domestic stock market suffering from lower valuations and inflated risk premiums compared to their global peers. This phenomenon has not suddenly emerged but has persisted -- and aggravated -- for a very long time, even as the country’s economy has grown to be included among high-income countries.

Based on a series of fact-finding meetings and consultations with experts, the government declared early this year that it would implement the Corporate Value-up Program, designed to help address issues responsible for the Korea Discount phenomenon. Under the initiative, the government has promised to establish a fair and transparent market order, improve accessibility to capital markets and strengthen protection for shareholders.

Stock prices had risen sharply for several weeks after the initiative was announced, as both local and foreign investors welcomed it and hoped the conservative administration would implement effective measures to resolve the problems. However, the buying spree quickly fizzled out due to a growing perception that the initiative relied too much on voluntary participation by companies and lacked strong tax and other incentives.

Even though the Seoul stock market’s benchmark Kospi rose sharply since the end of May on hopes for a strong export recovery, its gain of 7.2 percent for the whole period since the start of this year fell far short of not only the US but Japanese and Taiwanese indices. The S&P 500 index -- the broadest US stock price index -- rose 17.4 percent this year to date, while Japanese and Taiwanese indices jumped 22.9 percent and 31.9 percent, respectively.

Of course, it is premature to declare the government’s Corporate Value-up Program a failure simply because the Kospi rose less than the US, Japan and Taiwan for such a short period. But a recent report by the Korea Capital Market Institute explains very well why skepticism about the program’s long-term effect has so quickly replaced optimism.

The institute, the country’s only research organization specializing in the domestic capital markets, pointed out in the report that various issues related to market accessibility are interconnected. In particular, areas of market accessibility that South Korea lags in are not just rules and regulations but also process and practice, according to the report titled “Market Accessibility of Korean Capital Markets: Viewpoint of Foreign Institutions.”

Unlike many previous research reports on similar subjects, this report is based on in-depth interviews with 45 experts at 15 global asset managers, banks, custodian banks, market makers, hedge funds, system traders, the Asia Securities Industry and Financial Markets Association, and the Global Financial Markets Association operating in the local market. Some of their answers, disclosed in the report, vividly show that the problem lies more with the process and practice than with the institutions and regulations.

The report disclosed some of the answers the interviewees provided in eight categories, including such sensitive areas as the controversial stock short-selling and still ineffective publication of corporate disclosures in English. However, what struck me the most was their complaints and advice on the still poor quality and nature of South Korea’s communication activity regarding foreign participants in the domestic capital markets.

An interviewee working at a global bank pointed out that in South Korea, important system changes affecting foreign investors and companies are often announced without sufficient communication with market participants. This contrasts with major advanced markets, where such important system changes are prepared with a sufficient review period and a consultation procedure with major stakeholders.

The interviewee added that in South Korea, the procedure for collecting opinions is sometimes conducted merely because it is required by law. I think this complaint, although expressed politely and indirectly, tells a lot about how poorly South Korea is managing the processes of making and implementing policies, not only regarding foreign investment in capital markets but also in other sectors.

In South Korea, the process of communication is often regarded as an annoying task and is implemented merely because of legal responsibility in public as well as private spheres. As a result, many activities undertaken in the name of communication mostly fail to attract the participation of diverse stakeholders and produce useful outcomes.

After all, the Korea Discount phenomenon may not apply only to the stock market but reflects underlying problems in South Korean society as a whole. Even if it does apply mostly to the stock market, the undervaluation of local companies has far broader implications for the overall economy than we may think. It may limit companies' ability to attract capital and hamper their expansion plans, which can hinder job creation and overall economic growth.

I am not writing this column to say that the Corporate Value-up Program is destined to fail but to point out that the program alone may not be sufficient to change the situation fundamentally as long as the deeply rooted practices remain.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.