[Inside Chodong] Welcoming the Abolition of the Foreign Investor Registration System

[Asia Economy Reporter Song Hwajeong] The Korean stock market has long been tagged with the label "Korea Discount." The Korea Discount refers to the phenomenon where the stock prices of Korean companies are undervalued compared to those of foreign companies. Whenever the domestic stock market underperforms relative to overseas markets, the analysis inevitably points to the Korea Discount. Being evaluated as inferior to others is not a pleasant notion for the Korean stock market.

According to the Korea Capital Market Institute, an analysis of listed companies in 45 countries from 2005 to 2021 showed that the price-to-book ratio (PBR) of Korean listed companies was only 52% of that of developed countries. Compared to emerging countries, it was 58%, and even when compared to Asia-Pacific countries, it was only 69%, demonstrating that the Korean stock market is indeed undervalued relative to overseas markets.

So why is the Korean stock market evaluated less favorably than others? The causes of the Korea Discount include geopolitical instability due to inter-Korean relations, opacity in corporate governance and accounting, and rigidity in the labor market. When hearing these reasons, they are somewhat understandable. The tense standoff with North Korea, which could escalate into a crisis at any moment, is a source of instability for Korea. Considering recurring owner risks, embezzlement incidents, and past accounting scandals involving large corporations, it is understandable that the market has struggled to receive proper valuation.

The situation has improved compared to the past. Geopolitical instability, once a major cause of the Korea Discount, has recently had much less impact on the stock market. Even when North Korea conducts missile provocations, stock prices no longer fluctuate as dramatically as before. Issues with opaque corporate governance and accounting are continuously being improved to meet global standards. Efforts to ease labor market rigidity are also ongoing. Nevertheless, it is not easy to remove a label that has been attached for over 20 years. Over time, in addition to previously identified causes, political risks, low levels of shareholder returns, and other factors have been added, solidifying the Korea Discount as if it were inevitable.

Recently, the government has taken decisive action to eliminate the Korea Discount. It has decided to abolish the foreign investor registration system, which has been maintained for 30 years and was considered one of the causes of the Korea Discount. The foreign investor registration system requires foreigners who wish to invest in domestic listed securities to pre-register their personal information with financial authorities. This system does not exist in major developed countries such as the United States, Japan, or Germany, and was introduced in 1992 to manage investment limits by stock after allowing foreign investment in listed stocks. Although the limit restrictions on general listed companies, excluding 33 stocks in key industries, were lifted in 1998, the foreign investor registration system has been maintained. It has been criticized as an excessive regulation that raises barriers for foreign investors and has acted as an obstacle to Korea's inclusion in the Morgan Stanley Capital International (MSCI) developed market index. Korea has been striving to be included in the MSCI developed market index since 2008, but inclusion has not been achieved due to the foreign investor registration requirement, lack of English materials, and absence of offshore foreign exchange markets. The financial authorities plan to abolish the foreign investor registration system within this year and enhance the English disclosure obligations of domestic listed companies starting next year to improve foreign investors' access to investment.

With the government taking decisive measures such as abolishing a 30-year-old outdated system to resolve the Korea Discount, it is hoped that this time the label "Discount" attached to Korea will finally be removed.