Koreans Remain Shy About Boom in Stock Market : Officials Reluctant to Relax Rules Denying Foreigners Full Ownership of Shares

Kim Jin Hong will be in trouble if her parents find out she is investing in the stock market, because that is not what unmarried young women are supposed to do with their spare cash in South Korea’s conservative society.

But Kim, 28, a junior executive at a garment company, could not pass up the opportunity to watch her money multiply, effortlessly.

She started with a $7,000 investment in a trading firm that went public last year, and the value of her shares has more than doubled. The other day she entrusted another $4,000 to a broker, a “friend of a friend,” to be traded--at the broker’s discretion through a false-name account--on the booming Korea Stock Exchange.

“I don’t feel ashamed, but I can’t tell my parents about it,” said Kim, who shares an apartment with her mother in a Seoul suburb. “They think it’s gambling, too risky. But if you’re afraid of risk, you’ll never make big money.”

Thousands of small-scale investors like Kim are discovering the bonanza in stocks, which have gone skyward along with South Korea’s rapid economic growth, burgeoning trade surplus and currency. The exchange’s composite stock price index jumped 73% last year and nearly doubled in 1987. Capital gains, it should be noted, are not taxed here.

Said a Korean stockbroker: “The joke last year was that there are two types of fools in Seoul--those who don’t invest in stocks, and those who don’t have tickets to the Olympics.”

If everything goes according to plan, foreign investors, who are still barred from investing directly in Korean stocks, will be allowed a substantial piece of the action within three years. The Ministry of Finance announced a liberalization plan late last year that would lift the restrictions by 1992. Currently, overseas investment opportunities are limited to two international funds and five convertible bonds.

But growing concern about inflation may cause Seoul’s economic planners to further delay liberalization. The Finance Ministry denies it, but analysts say authorities already show signs of balking at a planned expansion of the $100-million Korea Fund, a closed-end fund listed on the New York Stock Exchange.

Fear Overheating

It would not be the first time that officials reneged on promises to open up: The original liberalization plan, drawn up in 1981, declared that foreigners would be able to invest in the stock market by 1988. Now only foreigners who have lived in South Korea for more than six months can trade.

Behind the reluctance to implement the plan is the fear that a sudden influx of foreign capital, especially Japanese capital, will dangerously overheat the domestic capital markets, which are already swimming in excess liquidity.

South Korea’s money supply has grown 18% to 21% in each of the last three years, and the government has been frustrated in its efforts to encourage more capital outflows to release monetary pressure. Few investors or corporations want to take their money overseas and face certain foreign exchange losses--the won appreciated against the dollar by 14% last year--while missing out on double-digit interest rates and skyrocketing stock and real estate prices at home.

Also working against rapid change is an attitude among some policy-makers that windfall profits should be reserved for Koreans.

“Privately, they’ll come right out and say, ‘Why should we let foreigners participate in this bonanza?’ ” said George W. Long, chief representative in Seoul for W. I. Carr (Overseas) Ltd.

Moreover, South Korean securities executives are quick to point out that their market, and industry, is smaller, weaker and more vulnerable that Tokyo’s, which took some 20 years to fully liberalize.

An Ethics Problem

“I hate to say it, but we need more time to prepare to compete with foreign securities companies on an equal footing,” said Kwon Ki Jung, senior managing director of Tong Yang Securities.

The market also needs some time to clean up its act, some critics say. Insider trading, market manipulation and political campaign fund raising is said to be rampant and largely unpoliced, thriving largely through false-name brokerage accounts, which are legal. The government created false-name accounts years ago to draw precious capital into the market, but it is now having difficulty curbing them, despite taxing their dividends and interest at three times the rate of real-name accounts.

“Korea is an extremely regulated place, but in terms of ethics in the securities industry, it’s not very regulated at all,” said Long.”If you’re a company president, and you want to manipulate your stock, you just go out and open several false-name accounts.”

Small wonder Kim’s parents disapprove. But last year the government announced that it would safeguard investor confidence by getting tough on securities regulation.

Public interest was piqued in March when the president of rapidly growing Tong Yang Securities was accused of making illicit profits through false-name accounts. The government vowed to crack down. It computerized its market surveillance mechanism and established a new policing division within the Securities Supervisory Board in September.

Then, in November, local newspapers ran photos of a gang of six brokers and Korea Stock Exchange employees dressed in prison garb and bowing their heads with their hands and arms tied in white ropes. They were arrested on charges of insider trading through false-name accounts in the first such case to be prosecuted.

“The stock market has greatly expanded in quantity, and it must now grow in quality,” Chong Chun Taek, president of the Securities Supervisory Board, told the Korea Economic Journal earlier this month. “We must all keep the rules of the game, be they written or unwritten.”

Chong added, though, that his watchdog agency should not be viewed as “punitory or disciplinary,” the newspaper said.

The market has other problems, too, chief among which is its poor liquidity caused by the thin float of shares. Only about 20% of the shares listed on the exchange actually trade, while the rest are locked up in cross-holdings among the chaebol, or giant conglomerates similar to Japan’s pre-World War II zaibatsu.

‘Invisible Hand’

As a result, investors at times find it difficult to buy in when the market is booming, and even harder to sell when it is falling.

Another anomaly is government interference. Finance Ministry regulators have been known to routinely extend an “invisible hand” to the market, making discreet phone calls to institutional investors for the purpose of giving them decidedly bad advice--such as urging that they buy on declines to dampen bearishness and prop up the market.

Tight government control hurts the market’s capacity to allocate funds efficiently, and the high cost of raising funds for Korean industry is a major impetus behind financial liberalization.

“The obsolescence of the financial sector has been cited as the major cause for the lopsided allocation of resources and income disparity,” Lee Pil Sang, professor of finance at Korea University, wrote in an article last year. “It is the consensus of market economists that the Korean economy is limping due to the lack of an appropriate financial market basis.”

Jump in Listings

The situation appears to be improving, however. Industry sources say Finance Ministry manipulation is much less prevalent now, and a surge in new listings may alleviate some of the problems with liquidity.

The number of companies listed on the exchange jumped 29% last year to 502, and total market capitalization nearly tripled to $94.3 billion.

Even once the market is liberalized, however, there is likely to be protectionist regulation for some time. Because of the fear of aggressive Japanese capital, analysts say foreigners probably will be allowed to buy only non-voting shares, and there almost certainly will be limits on the percentage of foreign ownership of individual companies and of the market as a whole.

But few dispute that the Korean stock market looks as if it will continue to be a safe gamble.

“The Korean economy still has the potential for continued high-paced growth,” said Han Keun Hwan, executive vice president of Daewoo Securities Co., Korea’s largest brokerage house. “And the potential of the stock market is unlimited.”