Foreign investors have been pulling out money en mass from South Korea's bond market, mainly short-term bonds, starting from August 9 after North Korea threatened to launch missiles on U.S. territory Guam.
According to the Korea Financial Investment Association (KOFIA) on August 17, foreign investors net sold 26.3 billion won (US$23.08 million) worth of bonds in the market this month. They had been continuously purchasing 2 trillion won to 4 trillion won (US$1.76 billion to 3.51 billion) worth of bonds every month from the beginning of this year. In July, the net purchases of foreign investors in the bond market reached 7.98 trillion won (US$7 billion). However, the buying trend has been converted into the sale from August. Between the 9th and the 16th when the “North Korea risk” escalated in earnest, they net sold 951.3 billion won (US$834.84 million) worth of bonds.
Foreign investors has sold mainly short-term bonds which have matured. They net sold 776.9 billion won (US$681.79 million) worth of monetary stabilization bonds (MSB) from the 9th to the 16th this month. MSBs are securities with a maturity of less than two years for financial institutions or individual investors issued by the Bank of Korea (BOK) to control the amount of money in circulation. During the same period, foreign investors net sold 174.4 billion won (US$153.05 million) worth of government bonds which mostly had a maturity of three years.
As the market has become unstable due to the North Korea risk, foreign investors have net sold short-term bonds in order to appropriate funds to invest in risk free assets. Market experts said that their net sale in the bond market has continued as the global financial market changes, like reduction in quantitative easing, have triggered by the North Korea risk. Accordingly, it can lead to the long-term trend.
Professor Kim Yong-ha from Soonchunhyang University said, “Basically, foreign capital in the domestic market is correlated with the U.S. capital market. The U.S. is making a move to raise the base interest rates but South Korea cannot raise the base interest rates because of some problems such as domestic business conditions and households debts. Foreign investors have started withdrawing their money owing to the North Korea risk from a short term perspective, but it can be the long-term trend caused by structural problems.”
However, foreign capital outflow from the bond market still has not hit the domestic financial market hard. Professor Kim said, “Since a lot of money flowed into the domestic bond market in the first half of this year, the BOK is not anxious about it yet. Even when foreigners keep pulling out their money from the market in the long term, this might not be a big problem with the domestic demand of government bonds, including national pension.”
Some say that the government should carefully consider whether to raise the base interest rates even when foreigners withdraw more money from the bond market in the long term. This is because household debts have reached 1,400 trillion won (US$1.23 trillion) and the domestic economy is stagnant.