KOREA FOCUS

Starting September 21, the Financial Times Stock Exchange Group, better known as the FTSE, raised the Korean stock market to developed market status from an advanced emerging market. Amid the rising expectations for Korea's inclusion into the FTSE list of developed world indices, foreign investors have already purchased more than 26 trillion won (US$22.2 billion) worth of Korean stocks this year.

 

Along with the Morgan Stanley Capital International (MSCI) indices, the FTSE is one of the most recognized international stock market indices. In this sense, Korea's inclusion is very meaningful; it is no longer considered a high-risk, speculative asset market. Instead, Korea has now been internationally recognized as an advanced market, assuring stability in asset values. The beneficial effects were immediately reflected in the Korea Stock Price Index (KOSPI), which gained 23.38 points, or 1.4 percent, to 1718.88 on September 22. Inflows of long-term investment funds such as pension funds and short-term funds chasing speculative gains into the Korean stock market are also on the rise.

 

Countries gaining FTSE developed market standing generally earn the MSCI developed market status one to two years later. Considering past precedents, Korea is expected to attain additional opportunities to boost its sovereign credit standing. In the meantime, we should work harder to prevent a repeat of the 1997 foreign exchange crisis.

 

In the 1990s, Korea popped the champagne too soon after mistaking its entry into the Organization for Economic Cooperation and Development as an entry into the ranks of advanced countries. The nation hastened to open its financial markets wider before sinking into a foreign exchange crisis. Following Korea's promotion to the FTSE developed market status, we should seriously ponder ways to genuinely stabilize and advance the domestic bourse and the overall economy.

 

First, the FTSE elevation means that the values of Korean listed companies have been stabilized even by international standards. It also means that evaluations and predictability of Korea`s corporate value and profitability have reached the levels of advanced countries. But Korean companies still have a long way to go in terms of transparency and efficiency. Their accounting data, public disclosures and investor relations systems, which are the basic criteria for evaluating corporate value and profitability, still remain opaque, backward and inefficient. The Korean companies themselves are well aware of the problems. It is not the time for us to be complacent. We should hurriedly upgrade our corporate accounting, disclosure and investor relations to the levels of the world's leading enterprises. The task is particularly urgent in consideration of our need to gain MSCI developed market standing.

 

Second, Korea's new FTSE standing is expected to further widen the price gap between large-cap and small and medium-cap stocks, as foreign investors are expected to concentrate their buying on blue chip stocks of all major Korean industries. If foreign investors continue to concentrate their purchases on large-cap stocks and individual Korean investors follow suit, the stock prices will be seriously distorted in the short run and the stock market will lose its primary function as a source of capital for fledging companies. Accordingly, the authorities should also look for measures to foster various types of venture capital financing and technology investment companies in order to help revive the stock market's basic function as a source of direct financing for promising enterprises with technological potential.

 

Third, we cannot rule out the possibility that the nation's promotion to the FTSE developed market status and the ensuing surge in foreign investments into blue chips could eventually threaten the management rights of domestic companies. There may be an outbreak of hostile takeover threats by foreign investors. The authorities are required to hurriedly overhaul stock market systems to protect domestic enterprises from hostile takeover threats by foreigners and help stabilize business activities. Following the recent elevation in the FTSE standing and the influx of foreign investors, the government has to ensure that the stock market continues to function as a stable source of capital for local companies.

 

We have too many urgent tasks to be complacent about the fact that the Korean stock market has been recognized as a developed market. The local stock market should not be turned into an enlarged gambling arena. Korea's inclusion into the FTSE developed market index will become truly meaningful when its stock market functions as the heart of the Korean economy and plays a key role in discovering and financing sound and promising enterprises.

[ Munhwa Ilbo, September 23, 2009 ]