Seoul risks deepening ‘Korea discount’
Moon Jae-in risks pulling Korea backward at the worst possible moment with what is essentially a $440-million stock bailout
There is a right way and wrong way to reassure skittish investors. But South Korea just chose the latter in a big way.
Seoul has long grappled with a “Korea discount,” a perception problem that depresses stock valuations relative to peers. Though North Korea’s threats are part of it, the real drag is insular practices that undermine shareholder interests.
Since 1997, when Korea crashed amid the Asian crisis, every president pledged to raise governance standards to international levels, to increase competitiveness and wealth. Each failed. Now, Moon Jae-in risks pulling Korea backward at the worst possible moment with what is essentially a $440-million stock bailout fund.
Korean shares have had a truly dreadful month, down nearly 15% since October 1. The culprit? A combination of Donald Trump’s trade war, slowing Chinese growth and worries that Moon’s bet on North Korean detente may be for naught.
These issues are more connected than meets the eye. President Trump’s tariffs are clipping the wings that long kept mainland demand aloft. Trump’s obsequiousness toward Pyongyang, meantime, threatens Moon’s legacy project. Trump gave Kim Jong Un loads of concessions, increased clout on the world stage and even making bizarre expressions of “love.” That, over time, may cut Seoul’s leverage right from under Moon’s ambitions.
As that gambit raises questions, Moon is left with an economy losing altitude. The stock rout may be a harbinger of troubles to comes as Trump’s efforts to tackle China reverberate across Asia.
The official composite leading indicator index has declined for 17 straight months now, dashing hopes Korea would grow 3% this year. Yet the depth and breadth of the Kospi index’s plunge highlight the trust problem hurting stocks.
Propping up stocks is a communist regime ploy
While Trump’s tariff arms race doesn’t help, the dominance of opaque, family-owned conglomerates still undermines the market relative to peers. Moon has had 538 days in office to curb the influence of Korea’s “chaebols”. Despite success in hiking taxes for top corporate earners – to 25% from 22%, he has treaded carefully on upending the status quo. The oligarched reality that landed predecessor Park Geun-hye in jail persists.
Moon is implicitly preserving that system with the government’s new stock bailout fund.
When trying to wall your markets off from potential contagion from China, it’s best not to turn them Chinese. Propping up stocks is the stuff of Xi Jinping’s Communist Party, not an Organizing for Economic Cooperation and Development economy like Moon’s. It skews incentives, increases moral hazard risks and screams more of desperation than leadership.
Beijing did the same earlier this month as the CSI 300 index plunged, just as it had in 2015. It treats the symptoms of financial cracks, not underlying causes. In China’s case, it’s a dearth of transparency, questionable ownership schemes and an economy fueled by bubbles in debt, credit and property prices.
Comparing Korea with China is quite a reach. Why, then, would Moon’s team resort to investor welfare? For one thing, it’s easier than doing the heavy lifting of taking the chaebol down a peg or two. For another, it’s a means of wooing foreign punters back to a market that’s taken on a casino quality in recent months.
Yet Moon’s team is putting the cart before the proverbial horse. Sure, geopolitics play some role in the Korea discount. The real problem, though, is muddy corporate structures that destroy shareholder value, depress dividend payouts and chronic insularity that limits long-term value investment.
In 2013, President Park took office pledging to overhaul the chaebol. Her plan to devise a more “creative” economic model aimed to increase space for small-to-midsize companies and startups to thrive. She talked of enforcement against monopolistic behavior and taxing excess hoarding of cash that chaebols could use to fatten paychecks.
Yet, just like her predecessor Lee Myung-bak, himself a former chaebol CEO, Park opted to light touch regulation for fear of denting economic growth rates.
Enter Moon, who since May 2017 has sought to give “trickle up” growth a try. A 16.4% hike in the minimum wage was a good start. But Moon’s promises of income-led growth and rising wages require considerable heavy lifting.
A bailout fund pulls Moon’s reform ambitions in the wrong direction. Granted, the $440-million safety net is rather paltry for a $1.7 trillion economy. Yet it’s all about that message such a policy sends.
Influence peddling scandals at Samsung, family-succession brawls at Lotte, the “nut rage” drama over at Korean Air and myriad other examples remind us Korea Inc. answers to no one.
That’s why the government must clamp down clearly and assertively on monopolistic behavior. It must police the cross-shareholdings, internal mergers, seniority-based promotions and the practice of public companies handing chairmanships to grandchildren in spite of fiduciary consequences.
It won’t be easy to wrestle control from the names that tower over Asia’s fourth-largest economy. Names that helped Korea rise from the ashes of war and spread its wings globally.
As it falls to Moon to buttress confidence in the Korean market, he’s going for public relations, not a better product. Moon should be leveling the playing field and shining daylight on Korea Inc. shortcomings. Instead, he’s tossing money at a very old problem that, sadly, isn’t about to go away.