The purpose of this research is to predict market evolution based on the relationship between the effect of won appreciation and the current status of foreign direct investment in the domestic stock market. This document also proposes policy in line with the research results.
After the establishment of the Korea Fund in 1984, the Korea Europe Fund in 1987, and the Korea Asia Fund in 1990, funds raised by profit-making securities issued to domestic and overseas investors by domestic investment trust companies listed on foreign stock exchanges was invested to matching funds of combined indirect investments in domestic and overseas markets. Prior to joining OECD, it was announced that investment by foreign investors increased from 12 percent from December of 1994, to 15 percent by 1995. From 1981 to 1991, foreign investment totaled approximately USD 5.4 billion, but after FDI was allowed, Korea experienced a large influx of currency, worth USD 20.3 billion from the United States and the United Kingdom, from the first quarter of 1992 to the second quarter of 1994.
Since 1990s, the introduction of the market average exchange rate system, foreign exchange and related deregulation, and the direct opening of the stock market made capital transactions and concurrent account fluctuations possible, causing losses of validity. Direct investment by foreigners, unable to be controlled by the flow of funds, has a direct impact on the domestic exchange rate.
By applying the exchange rate determination model under the opening of the stock market, measuring the Currie & Hall model in consideration of flow effects, the stock effect according to capital flow, substituting variables with OLS estimates of the exchange rate equation, and the Kalman Fiter method, we can examine Korean currency appreciation effects of the stock market opening. According to the analysis, as the domestic stock market became bullish during the 80s, the expansion of profit-making securities exclusive to foreigners, investment-only funds, convertible bonds, bonds with warrants, the expansion of foreign investment through depository receipts, and capital inflow—a result of the 1992 permission for foreigners to hold domestic stocks— increased together. After 1993, concurrent account fluctuations, currency-fluctuation-correlated instability phenomenon, and external appreciation pressure by the United States have also become evident.
In consideration of the export competitiveness of domestic enterprises in relation to the stock market opening as it relates to Japan, Korea’s main trading partner, the real effective exchange rate between Japanese Yen and Korean Won was devaluated due to the strong yen in the second quarter of 1994. However, calculations of the real effective exchange rate are difficult to determine due to the intervention of the exchange market by arbitrary discretions, such as the choice of the base time and changes in regulations related to trade and capital movements. The competitiveness of domestic firms in the United States is stronger than Japanese and Taiwanese firms, but weaker than Singaporean firms by more than 10% as of 1993, where inflation is very low. Dollar-based export competitiveness of Korea rose 1.3 times whereas that of Singapore rose once since 1985. In spite of price stability, however, Korea remains unsatisfactory.
The opening of the stock market is accompanied by the expansion of funding opportunities, increased efficiency of resource allocation, and exchange rate instability. Concomitantly, external market intervention by a central bank to control exchange rate appreciation could bring negative consequences that can attract a foreign exchange profit-seeking investment. Currently, ahead of additional opening of the stock market, foreign capital inflows are expected to increase. Therefore it is necessary to promote the liberalization of capital, develop policy for exchange rate stability, and strengthen the currency redemption functions, because foreign exchange markets can stay instable due to excessive currency appreciation. Also, the reduction of government expenditure of low investment priority to establish a fiscal surplus, the improvement of tax administration, tax system reform, the stable operation of macroeconomic policy, the dissolution of exchange rate appreciation pressure and currency management burdens resulting from capital liberalization through the deregulation of external investment by the private sector, the import expansion of scarce goods, the expansion and costs reduction of facilities, alleviation of certain regulations, and the promotion of competition is required.
주식시장 개방의 원화절상효과(Korean currency appreciation effect of stock market opening)
서울 : 한국개발연구원
|Journal Title; Vol./Issue||한국개발연구:Vol. 16(Issue 3)|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|