[Insight & Opinion] Three Solutions to Revive the Korean Stock Market

The KOSPI 2400 level is under threat, and the stock price of Samsung Electronics, Korea's representative company, briefly fell below the 50,000 won mark, raising concerns about a stock market downturn. While most foreign stock markets, including the U.S., are enjoying a boom, only the Korean stock market is experiencing a deepening recession and falling stock prices, leading to even discussions about a crisis in the Korean economy.

Policy authorities have implemented various measures to revive the stock market and resolve the Korea discount to increase valuation. Short selling has been banned, and measures to reduce asymmetric information between companies and stock investors by strengthening disclosure of corporate information such as financial statements have been announced. Recently, the Democratic Party proposed a bill to protect shareholders' interests in the amendment to the Commercial Act and is also pushing for the abolition of the financial investment income tax. However, as all remedies have proven ineffective, investment funds are leaving the Korean stock market and moving to the U.S. stock market. It is urgent to prepare measures to revive the stock market, which is a direct financing channel for companies.

First, the technological competitiveness of new industries must be enhanced. We are currently in a major industrial structural transformation due to the development of artificial intelligence (AI), batteries, and semiconductors. The reason why U.S. stock prices are rising and attracting investment funds is that U.S. companies and the government have increased investments in new technologies such as AI. On the other hand, Korean companies have lost competitiveness in key industries such as shipbuilding, steel, electronics, and petrochemicals due to China's pursuit, and they need to find growth engines in new industries, but they have not increased investment in new industries. The government also did not implement new industry policies, although government support is needed for training specialized technical personnel and developing new technologies in the early stages of new industry development, as investment risks are high. Policy authorities must establish new industry policies, and companies must increase investment in new technology development to enhance technological competitiveness so that the Korean economy can leap forward again and the stock market can be revived.

Second, stock price manipulation must be prevented to establish fair trade practices. The Korean stock market is small and is a typical inefficient market where stock price manipulation through collusive trading is rampant. In addition, the penalties for financial crimes such as stock price manipulation and fraud are low. This is evident from the fact that Koreans accused of international financial fraud prefer to be tried in Korea rather than in the U.S. As the economy enters a low-growth phase, stock price manipulation is expected to become more rampant, and capital outflow from the domestic stock market is feared to accelerate. No investor wants to invest in a domestic market rife with stock price manipulation and suffer losses. Policy authorities and the National Assembly must amend laws and systems to impose severe penalties on financial crimes such as stock price manipulation at the same level as the U.S. The Korean stock market can be revived when fair trade is established.

Third, taxation and government regulations related to stocks must be aligned with global standards. In an open capital market economy, during periods of high growth, even if taxation or government regulations are higher than those of advanced countries or established based on specific ideologies, investment returns are high, so capital does not flow overseas. However, in a low-growth phase, if taxation or strong government regulations are higher than global standards, capital will flow abroad as it does now. Korea is entering a low-growth phase with an open capital market. If global standards are not followed, side effects such as domestic demand recession, outflow of national wealth, and worsening economic inequality due to overseas capital flight will inevitably worsen. Policy authorities and the National Assembly must face the changed stock market environment and boldly reform taxation systems and government regulations that do not meet global standards.

The emergence of new industries is rapidly changing the Korean stock market environment. However, the main causes of the stock market downturn and falling stock prices must be found within the Korean economy. These are the weakening of technological competitiveness, the absence of new industry policies, and various taxation, laws, and systems that do not conform to global standards. Policy authorities and the National Assembly must recognize the changed stock market environment and implement proper measures to help the Korean stock market escape the current recession phase.

Kim Jeong-sik, Professor Emeritus, Department of Economics, Yonsei University