Last month foreign investors experienced a net outflow of US$1.7 billion (2.26 trillion won) from their investments in domestic stocks and bonds, marking the first time in 7 months since January that such a substantial withdrawal has occurred. Both stocks and bonds saw capital leaving the market during this period.
According to the “Trends in International Finance and Foreign Exchange Markets After August” report published by the Bank of Korea (BOK) on Sept. 12, foreign investors pulled out US$1.7 billion from domestic securities. Foreign investors had been in a net inflow trend for the past 6 months since a net outflow of US$340 million in January, marking a reversal to net outflows after 7 months. This represents the largest capital outflow in 8 months since a net outflow of US$2.42 billion in December last year.
In the stock market, there was a net outflow of US$910 million, marking a reversal to net outflows in just one month. This shift is attributed to weakened expectations for the domestic economy due to concerns about China’s economic slowdown and other factors.
Bond funds also experienced a net outflow of US$790 million. Bond funds had seen net outflows of US$5.29 billion and US$520 million in January and February, respectively, and experienced a net inflow trend for five consecutive months. However, last month marked a reversal to net outflows, the first time in six months.
The BOK said, “The shift to a net outflow was influenced by relatively large maturing investments as well as the ongoing lure of low arbitrage trading profits.” Foreign investors had a relatively large amount of US$8.96 billion invested in bonds in May, with a focus on investments in arbitrage trading, such as three-month currency stabilization bonds and treasury bills. However, as many of the funds matured in August after three months, coupled with decreasing incentives for arbitrage trading, the demand for reinvestment declined.
The average daily foreign exchange transaction volume in the domestic interbank market was US$28.63 billion, showing a decrease of US$3.17 billion compared to the previous month’s US$31.8 billion. Foreign exchange transactions tend to be larger at the beginning of the year and decrease during the summer vacation season in August and at the end of the year. Spot foreign exchange and foreign exchange swap transactions also decreased by US$1.49 billion and US$1.33 billion, respectively, to volumes of US$12.09 billion and US$13.24 billion.
In August, domestic banks’ spread over the base rate for borrowing showed mixed trends between the medium to long-term and short-term sectors. The medium to long-term spread decreased by 18 basis points (bp) to 74 bp compared to the previous month of 92 bp. However, the short-term spread increased from 18 bp to 23 bp, marking a 5 bp rise. This slight increase in the short-term spread can be attributed to the extension of borrowing periods. The premium for foreign exchange stabilization fund bonds’ credit default swap remained unchanged at 31 bp compared to the previous month.