This study analyzes Korea’s recent pattern of fund flows to understand the reasons behind and the risks involved in the recent growth in profit-making securities investments, and proposes policy tasks to secure mid-/long-term efficiency in fund allocation.
The recent spikes in Korea’s corporate sector investments in financial securities are raising concerns of possible excessive financial profit-seeking and questions regarding the use of corporate cash reserves. Shrinking real investments following the crisis and the need for firms to secure liquidity can explain recent financial investment trends by the corporate sector. In particular, recent economic recovery is contributing to corporate cash flows, which tend to go to profit-making securities rather than savings accounts, which provide relatively low interest rates. The total size of the corporate sector’s security holdings is still fairly low. However, also driving corporate investment behavior is the fact that since 1998, there has been no limit imposed on the total amount of financial investment by conglomerates.
When the economic growth rate falls from 8-9% to 5-6%, demand for equipment investment at firms also falls, and mature industries have greater incentive to use their funds for dividend-yielding assets or financial assets. As of 1995, financial assets accounted for 32.5% of total assets held by the Japanese manufacturing sector while the percentage stood at 13.1% for Korean companies as of 1997. During Japan’s rapid growth era, however, Japanese manufacturing firms suffered from chronic fund shortages and therefore had a very small amount of financial assets.
While persuading manufacturing firms to move away from security holdings could be difficult, banks could encourage financially unsound firms to pay down their debts. The growth of the stock market, investment trusts, and mutual funds will facilitate the operation of financial institutions, which will help make Korea’s capital market more efficient, as well as increase the supply of risky or long-term capital. Thus, there exists a strong need to promote capital markets, which will in turn induce venture and R&D investments.
Firms and financial institutions can be exposed to greater price volatility as their asset values critically hinge on how the stock market unfolds. Therefore, the Korean government should set out to secure a stable stock market, help firms and financial institutions adopt advanced risk management processes, and establish a sound financial supervisory system.
최근의 자금순환동향 분석과 정책과제(Korea’s recent flow of funds)
|Series Title; No||정책포럼 / 제147호(9904)|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|