Korea, a little bit of danger

In recent times, among the major economies in the world today, the stock, debt and currency triple kill, in addition to the United Kingdom…

In fact, there is also South Korea.

Let’s look at the stock market first. The Korea Composite Stock Index (KOSPI) has fallen from a high of around 3,300 in 2021 to its current level of around 2,200, a drop of 1/3, or 15% in a month and a half from mid-August to now.

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Then look at South Korea’s government bond yields – from about 3% in late August, they have soared to a high of 4.3% in a month, and this has meant a significant drop in the price of South Korean government bonds.

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Finally, let’s look at the familiar exchange rate of the US dollar against the Korean won, which has appreciated since March 2022, from 1,200 won to a high of 1,440 won in six months, equivalent to 17% depreciation, second only to Japan in East Asia.

Come to think of it, just in July 2021, at the 68th session of the Trade and Development Board of the United Nations Conference on Trade and Development, 195 member countries, unanimously adopted a resolution officially recognizing Korea as a developed country – that is, Korea’s status as a developed country was recognized worldwide.

On the other hand, Korea’s GDP will reach $1.8 trillion in 2021, placing it in the top 10 economies in the world – and fourth in Asia after China, Japan and India – ahead of Russia and Brazil.

In terms of currency exchange rates against the U.S. dollar for the four largest Asian economies (China, Japan, India and South Korea) since 2022, the Japanese yen is the most depreciated, followed by the Korean won and then the Chinese Yuan, while the Indian rupee is the least depreciated.

Because of the low rate of interest rate hike or no rate hike or even rate cut at all, the price of Indian government bonds is slightly reduced, while Japan is basically maintained; while China’s government bonds, because of the reduced interest rate, are even rising; only South Korea’s government bond prices have fallen the most, which greatly pushed up the financing rate within the Korean economy.

In terms of the stock market, except for India, the stock markets of China, Japan and South Korea have fallen since 2022, but South Korea has fallen the most, while the Japanese stock market has instead fallen the least.

In terms of economic growth in dollar terms in the first half of the year, China and India have basically maintained positive growth compared to the same period last year, while Japan and South Korea, both have seen significant declines compared to the same period last year.

We can’t help but ask, as one of the typical representatives of East Asian export-oriented economies, why South Korea suffered a “stock, debt and exchange” three kill, in terms of misery, even worse than Japan?

The reasons are actually very similar to the UK, which I discussed earlier.

Excessive debt

Trade deficit

Then, interest rate hikes detonated.

(a) Let’s look at the Korean debt problem first

In previous articles, I have explained that private non-financial corporations are the core of wealth creation in a society, and the history of economic development in several countries shows that it is generally appropriate to observe private non-financial corporations/GDP in the range of 30%-120%.

Too low, indicating that the corporate credit of the society as a whole is not fully developed.

Too high, it indicates that corporate debt capacity is reaching its limit and the economy will be in trouble.

Korea’s non-financial corporate debt leverage ratio (ratio to GDP), by March 2022, had reached 115.2%.

Why did the Asian financial crisis of 1997-1998 break out in Korea and have far-reaching effects?

The core reason was that Korea’s private non-financial corporate debt was too high, reaching a historical high of 110% at that time.

The debt of the private non-financial sector was so high that the Korean economy fell into crisis, and by the end of 1998, the indicator had risen to 116%, the highest ever, because of the economic slowdown.

In any case, because of the Asian financial crisis, if Korea has some experience in dealing with the high debt of private non-financial companies, it has not experienced the heavy debt burden of the residential sector.

At the end of 2021, Korea’s total household sector credit/GDP ratio reached 106%, which is almost the highest level of any major country in the world, with only Australia and Canada coming close to it – but as we all know, both Canada and Australia are of the “family with a mine” type. But we all know that both Canada and Australia are of the “family of mines” type, and are the main immigration destinations for the world’s rich today, and it is the purchase of homes by wealthy immigrants that pushes up the debt of these two residential sectors.

As for Korea, but like Japan, is a mono-ethnic country, in the case that there is not a large number of wealthy foreigners to buy houses, the debt rate of the residential sector is so high, the Korean economy in the future to a slight wind, the people cannot pay the home loan, like the United States subprime mortgage crisis, it is likely to come to Korea.

(2) Look at Korea’s import and export trade and foreign exchange reserve accumulation

Since its economic rise in the late 1970s, Korea has been one of the world’s leading exporters of manufacturing goods.

For most of the past 30 years or so, Korea’s exports have been much larger than its imports, and its foreign exchange reserve accumulation has been among the highest in the world.

The problem, however, lies in this small part of the time.

Periods of time when Korea had a persistent trade deficit and declining foreign exchange reserves

1995-1997, when foreign exchange reserves continued to decline, followed by the financial crisis in Korea

2008, a steep decline in foreign exchange reserves followed by a financial crisis in Korea under the influence of the United States.

2022,

Why has Korea run a trade deficit since 2022?

This is clear to everyone, as a “two-headed” manufacturing country, into 2022, with the price of commodities soaring, South Korea needs to import raw materials prices soaring, export industrial goods but the increase is limited, and South Korea is one of the world’s largest food importers.

The existence of this scissors difference has led to South Korea running a trade deficit for eight consecutive months, especially recently, when its trade deficit reached about $5 billion in a single month, resulting in a sharp decline in South Korea’s foreign exchange reserves ……

This is the reason for the sharp depreciation of the Korean won since 2022.

(iii) The Bank of Korea follows the Fed in raising interest rates, which may trigger a financial crisis

(b) We all know that interest rates cannot be raised when the debt burden is high; otherwise it is likely to bring about a wave of defaults and bankruptcies.

We all know that the foreign exchange reserves of countries with export-oriented economies cannot continue to decline, otherwise there is a high probability of economic crisis.

Import and export trade deficit, not decided by South Korea, we have nothing to say, God rained, had to get wet – but, the matter of raising interest rates, South Korea followed the United States, it is a bit of a swollen face to fill the fat.

Asia’s four largest economies (China, Japan, India and South Korea), in terms of the rate of interest rate hikes, although India is also following the U.S. rate hikes, but only from 4% to 6%, equivalent to 50% of the rate increase; Japan has so far kept interest rates unchanged; as for China, whether from the Treasury yields or LPR, not only did not raise interest rates, but also in the rate cuts.

Only South Korea, basically following the pace of the U.S. interest rate hike, its benchmark interest rate rose from 0.5% to 2.5%, equivalent to a four-fold increase, resulting in its Treasury yields also went all the way up – at the beginning of the year, South Korea’s 10-year Treasury yield was only about 2%, and now, it has risen to 4.2%.

As I said earlier, South Korea’s corporate debt, which is close to the highest in history, and residential debt, which is not only the highest in history, but also the highest in the world, and private sector debt is so high that a quick interest rate hike under such circumstances would be like poking yourself in the heart with a knife.

For enterprises, they intend to finance new projects, and when they see the interest rate is so high, why do they bother?

Definitely stop, may bring new growth in wealth of the project so yellow!

What is this called?

It’s called “my first”!

Can you do it in Korea?

Are you a world currency?

No such status, the debt is so high, import and export trade is so poor, but also follow the Federal Reserve to learn to raise interest rates, must be swollen face fat, now, the face is swollen up, but the internal body, has long been blood gas, upside down.

Simply put, the Korean economy is now really a little dangerous, if the Bank of Korea continues to raise interest rates, then, from a full-blown financial crisis or economic crisis –

Either, just one or two large corporations short of bankruptcy due to debt default.

Either, just short of Seoul Bussan Incheon Juju Island home prices plummeted.

 

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