TCS Daily


War on Foreign Speculators

By Andy Jackson - January 18, 2006 12:00 AM

For the last several years, the Korean government has been fighting the appreciation of its currency, the won. Despite their efforts, it recently passed the psychologically important 1000-won-to-the-dollar mark and is projected to eventually rise to around 950 to the dollar. The rise of the won has caused panic in the government, which is taking measures to bring it back down. Among those measures are threats against foreign speculators. One Seoul-based economist went as far as to say "This is some kind of war."

While the Korean government acts as if a triple-digit exchange rate is some kind of aberration, the won is still well below its historic value. Between October 7, 1991 and January 10, 1997 the exchange rate stayed between 750 and 850 won to the dollar. It did not rise above 1,000 won to the dollar until November 18 of that year, just before the Asian financial crisis drove the won into a freefall. International Monetary Fund intervention was eventually required to control the problem.

To this day, most Koreans refer to the Asian financial crisis as 'IMF.' Many Koreans felt that the IMF's program was a national humiliation that subjugated Korea to western (especially American) control. Many blame mercurial 'foreign speculators' without noting the factors that caused the flight of foreign capital (such as a lack of transparency in corporate management and government intervention in the banking industry to funnel loans to favored companies and projects).

Today, foreign speculators are still the bogeyman and Vice Minister of Finance and Economy Kwon Tae-Shin said that the won's rise "cannot be seen as normal" and that its rise was the result of "speculative forces" that, according to a news account, the Korean government would deal with harshly:

In a statement issued after the meeting, the government added that "the Bank of Korea and the Financial Supervisory Service will enact its joint investigating power, which begins this year, to harshly deal with speculators if the government actually finds acts of foreign exchange speculation after closely monitoring forex movements."

The threats are part of the government's continuous efforts to keep the won artificially low against the dollar. But the government's policy is a victim of the Korean economy's success. An increase in exports has fueled growth, which in turn has boosted investment. Korea's main stock index, the KOSPI has risen even as the dollar fell against the won.

The government believes that a weak won is necessary to keep Korean exports competitive in the belief that Korean products must be cheap to maintain market share. That mentality is more appropriate for a nation hawking shoes, junk cars and plastic toys than for the developed economy that Korea has become. Investors are confident that the Korean economy will thrive despite the rise in the won. Unfortunately, the government is stuck in the 1970s.

In a more positive development, the government has eased restrictions on Korean investments overseas. The Ministry of Finance and Economy has raised the limit on individuals investing in overseas real estate from $500,000 to 1 million dollars. It has also increased the limit on Korean business' direct investing overseas from 3 million dollars to 10 million dollars. Limits will be abolished altogether by the end of the year. That will allow Koreans to take advantage of a strong won to purchase and invest in other countries, especially those that peg their currency to the dollar. The government will also ease other regulations related to overseas investment.

With Korea's trade surplus bringing in a rush of funds, the liberalization of outgoing investment will do more to stabilize the won in the long run than increased restrictions on incoming investment. Let's hope that the Korean government will choose to work with, rather than against, the market as it sets monetary policy in the weeks ahead.

Andy Jackson is a writer living and working in Korea.

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