[Insight & Opinion]What Matters More Than Propping Up Stock Prices

KOSPI Surges on Hopes for Stock Market Stimulus
Concerns Rise Over Disconnect from Real Economy
Restoring Growth Rate Through Structural Reform Takes Priority

The amendment to the Commercial Act has passed the National Assembly. The key points are the expansion of directors' fiduciary duties to include both the company and its shareholders, and the restriction of voting rights for the largest shareholder and their special affiliates to a combined total of 3% when appointing audit committee members. This legislation aims to protect shareholders' rights and enhance corporate transparency.

The governance structures of Korean companies need to become more transparent, and shareholder returns should increase. Addressing the undervaluation of the Korean stock market has been a pledge of President Lee Jaemyung, who has shown an interest in the stock market since his candidacy. In his press conference on his 30th day in office, President Lee also stated his intention to prepare for the KOSPI 5000 era through the advancement of the capital market. The stock market has already reflected these expectations. In June alone, the KOSPI rose by 13.9%. After failing to reach even 2,400 at the beginning of the year, the KOSPI has recovered the 3,000 mark for the first time in three and a half years.

The stock market boom is a welcome development?not only for investors. Stock market activation leads to a virtuous economic cycle by stimulating domestic demand and facilitating corporate fundraising. It is also expected to help disperse liquidity that has been overly concentrated in real estate. However, it is unrealistic to expect stock prices to continue rising if the economy is weak and corporate earnings do not increase.

While it is true that stock prices sometimes move independently of the real economy, they ultimately reflect corporate profitability and growth potential. There have been many concerns about the undervaluation of the Korean stock market, and efforts to address this are certainly necessary. However, improvements in corporate governance alone will not suddenly transform the Korean economy.

In the long run, stock prices ultimately follow the growth rate. It is not the real economy that reflects the asset market, but rather the asset market that reflects the real economy. Of course, periods of rising or falling stock prices do not always coincide with periods of economic expansion or contraction. This is partly because stock prices are a leading indicator of the economy, and also because asset markets can move independently of the real economy when liquidity increases or decreases.

However, all of these are only temporary phenomena. In the long term, the rise in the stock index is only slightly higher than the growth rate. In 2000, the KOSPI started at 1,028, and by the end of 2024, it closed at 2,399?a 133% increase. During the same period, Korea’s nominal per capita gross national income (GNI) rose from 21.98 million won to 43.91 million won, an income growth rate of 100%. The stock index growth rate was about 1.3 times the nominal income growth rate. On average, from 2000 to 2024, the annual nominal GDP growth rate was 5.9%, while the KOSPI growth rate was somewhat higher at 6.7%.

In the first quarter of this year, Korea’s economic growth rate was -0.2% compared to the previous quarter, marking a return to negative growth for the first time in three quarters. The International Monetary Fund (IMF) has cut its forecast for Korea’s economic growth this year from 2.0% to 1.0%, halving its previous estimate. The Bank of Korea’s growth forecast for this year has also fallen to the 0.8% range. While the stock market is important, it is not more important than the economy itself. Ultimately, what the government must focus on is not the stock price, but the recovery of the growth rate.

The previous administration also hoped for a rise in stock prices. This was the reason for banning short selling, attempting to abolish the financial investment income tax, and announcing programs to enhance corporate value. However, stock prices did not move as intended. Without structural reform and genuine improvements in competitiveness, sustained rises in stock prices are not possible.

Regardless of whether the government is conservative or progressive, Korea’s long-term growth rate has declined by about one percentage point with each administration. If this trend is not reversed, the Lee Jaemyung administration is unlikely to escape a long-term growth rate in the 0% range. Temporary boosts in consumption through increased fiscal spending are not a way to raise the potential growth rate.

Kim Sangcheol, Economic Commentator