[Seojunsik's Market and Economy] Behind the Record-Breaking Bull Market... The Korean Stock Market Is Losing the Golden Mean

Samsung Electronics and SK hynix: A "Black Hole" for Market Funds
Persistent Korea Discount for Small- and Mid-Cap Stocks
Policy Priorities and Market Signals Out of Sync

Prompt Launch of the Promised National Growth ISA
Introduce

The ancient Greek philosopher Aristotle, regarded as the ‘founder’ of economic thought, placed ‘the golden mean’ at the core of his philosophy. This concept refers to the wisdom of seeking the optimal point of balance, avoiding excess on either side.

On the 27th of last month, the status board at the dealing room of Hana Bank in Jung-gu, Seoul, displayed the KOSPI as well as the stock prices of Samsung Electronics and SK hynix. Photo by Yonhap News

Whenever possible, I have consistently advocated for revitalizing Korea’s stock market and for building an optimal system. The main reason for this is my belief that, in a capitalist society, stock capital plays the role of the golden mean and makes a decisive contribution to alleviating the polarization of wealth. The renowned historian, sociologist, and humanist Karl Marx also highlighted the function of the joint-stock company in ‘sharing wealth’. As wages and dividends derived from the productivity of joint-stock companies increase, so too does the economic capacity of ordinary people and the middle class.

It is deeply moving to see the KOSPI fluctuating above the 8,000-point level. However, we cannot welcome this bull market unconditionally. As is well known, the most notable feature of our stock market recently has been polarization. The two companies in the semiconductor sector, so-called ‘Samjeonnix’ (Samsung Electronics and SK hynix), have sucked up market capital like a black hole, while a large number of small- and mid-cap stocks and traditional industries have faded from investors’ attention and remain stuck in the mire of the ‘Korea Discount’. Even blue-chip stocks with steady profits have seen their prices drop over the past year. According to The Seoul Economic Daily, as of June 24, approximately 70% of KOSPI-listed companies had a price-to-book ratio (PBR) below 1, about 45% were below 0.5, and about 18% were below 0.3. Considering that in the United States, the proportion of companies with a PBR below 1 is just 5–10%, our situation is arguably among the worst in the world. The Korea Discount is, by all accounts, still an ongoing phenomenon.

The goal of stock market activation policies was never merely to boost stock prices. Not long ago, politicians spoke of becoming a ‘country that lives on dividends’. They promised a virtuous cycle in which citizens would invest in companies rather than real estate, prepare for retirement with dividend income, and where funds flowing into the stock market would provide growth engines for startups and innovative firms based on this trust. There were also pledges to ‘resolve the Korea Discount through governance and stock market system reform’ and to help minority shareholders suffering from stock prices far below liquidation value. Even after the change of administration, up until early this year, steps toward improving the structure of the capital market—such as amendments to the Commercial Act, restructuring the ‘dividend income tax system’, and the announcement of the ‘Stock Price Suppression Prevention Act’—appeared to be progressing steadily.

However, as stock prices soared due to the semiconductor boom, initial resolve has faded and the wheels of reform seem to have come to a halt. Of course, the boom in the semiconductor market is a great blessing for our country. But if we stop expanding irrigation or improving farmland just because of a bumper harvest, a bad year could deal a fatal blow. After all, it cannot be a bumper year every year. If we ignore the fragile structure in which 45% of listed companies trade at less than half their liquidation value, we cannot expect sustainable stock market revitalization or genuine economic benefits resulting from it.

It is even more regrettable that policy priorities and market signals are misaligned. The ‘Return-to-Korea Investment Account (RIA)’, designed to attract funds aggressively seeking capital gains abroad back to the domestic market, and the ‘Semiconductor Leverage ETF’, which could expose a significant part of the domestic stock market to speculative capital, were both launched at lightning speed without debate. In contrast, separate taxation for dividend income, despite strong market demand, was watered down amid fierce resistance, and the ‘National Growth Individual Savings Account (ISA)’, which the Ministry of Economy and Finance promised to launch in June, has yet to materialize. Government-controlled companies like Korea Electric Power Corporation and Industrial Bank of Korea, for some reason, failed to meet even the requirements for separate taxation on dividend income, disappointing their shareholders. Such inconsistencies only intensify sector concentration, encourage short-term speculation over long-term dividend investment, and send the wrong signal to the market that corporate governance no longer matters.

Fortunately, on June 19, it was confirmed that at least the nation’s leader shares the same sense of concern. President Lee Jaemyung stated at a press briefing in the Chunchugwan that “polarization in the stock market also leads to severe asset polarization, which is a problem and a concern,” and expressed his commitment to easing this problem. In this context, I offer several tasks that the government and National Assembly should undertake to resolve polarization.

First, the promised launch of the National Growth ISA must not be delayed any longer, and its scope should be greatly expanded beyond the original plan. If the government is truly committed to changing the structure of the capital market, it must more actively foster a dividend-focused investment culture. The National Growth ISA is essentially structured to concentrate tax benefits on domestic stock dividend investors, so expanding its scale can induce more capital into long-term dividend investments and significantly help ease market polarization. If the original limit of 200 million won brings in approximately 300 trillion won, raising the limit to 500 million won is expected to attract a total of 500 trillion won into undervalued dividend stocks over the next five years. While there may be concerns about a 3–5 trillion won reduction in dividend income tax, this would more than be offset by the rapidly increasing securities transaction tax revenue.

Second, legal measures to resolve ‘PBR undervaluation’, including the Stock Price Suppression Prevention Act, must be implemented with real effectiveness. What I am proposing is a kind of ‘permanent stock purchase claim system’. If a company holds excessive cash or idle real estate unrelated to its operations for an extended period and fails to utilize or return it to shareholders, resulting in a significantly low return on equity (ROE) relative to net assets, minority shareholders who meet certain requirements should be able to demand that the company purchase their shares, as stipulated in the Commercial Act. In such cases, the company should be required to buy back the shares at liquidation value reflecting the revaluation of real estate assets, or at the valuation standard under inheritance and gift tax law. Minority shareholders who have invested their hard-earned money in a company deserve, at the very least, a guaranteed exit at minimum value, even in the worst-case scenario.

Third, the listing of Korea Exchange must not be delayed any longer. The government cannot be the sole agent of ongoing stock market reform. To solve the polarization problem and maintain stock market revitalization, a consistent institutional agent is needed. The current approach, in which the government and National Assembly micromanage every detail, is inefficient. To reiterate, among developed nations, only Korea and Taiwan have exchanges that are not self-listed. Coincidentally, both countries have polarized structures in which a small number of stocks account for more than 50% of total market capitalization. In short, the exchanges in these countries have failed to discover and nurture new innovative companies that will carry the nation’s future. Only when the exchange becomes self-listed and gains strong innovative drive will our market be able to move closer to inclusion in major developed market indices and to realizing the dream of becoming a financial hub in Northeast Asia.

‘Polarization’ ultimately devalues the whole. Macau and Qatar, for example, both have a per capita GDP exceeding $80,000, but because their economies are heavily concentrated in casinos and oil, no one recognizes them as advanced economies. The golden mean—guarding against excessive concentration and seeking optimal balance. Are we not, in today’s stock market, losing sight of that wisdom?

Seo Joonsik, Professor of Economics at Soongsil University

This content was produced with the assistance of AI translation services.