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Foreigners sold more Seoul stocks than they bought for the 33rd consecutive day on Wednesday, marking the longest-ever selling streak, even though the country's benchmark index surged nearly 2 percent on weaker oil prices and an overnight U.S. rally.
Since June 5, foreign investors have dumped a net 9 trillion won (US$9 billion) of shares listed on the main KOSPI index during the longest selling spree on record, according to the Korea Exchange (KRX), the operator of the country's equities and futures markets.
So far this year foreigners have sold a net 21.5 trillion won of Seoul shares, nearing a record high foreign sell-off last year when they dumped a net 24.7 trillion won. Foreign stock holdings on the South Korean bourse have decreased to a record 30 percent this year, compared with 44 percent in April 2004.
KRX officials said the Seoul stock market suffered the biggest exodus of foreign capital in Asia with a net US$19.3 billion worth of shares in the first half, followed by India with a net US$6.5 billion and Taiwan with a net US$3.6 billion.
"Foreign investors reduced their exposure to Asian markets due to a credit squeeze in the first half," the bourse said in a statement. "They continued to go on a selling spree on inflation risks in the second quarter," it said.
Still worse, foreigners are also leaving Seoul's bond market, with South Korean bond prices soaring led by heavy foreign buying in bond futures, painting a gloomy picture of the South Korean economy. The massive exodus by foreign investors comes as financial policymakers have struggled to head off slides in shares.
Vice Finance Minister Kim Dong-soo asked that investors "not react too sensitively." "I acknowledge there are difficulties, but corporate profits are relatively good and fund flows around the stock markets are abundant," he said.
The South Korean financial watchdog has launched a probe into short selling and stock lending by foreigners, which it said exacerbated the volatility of stock prices and damaged market stability.
According to the Financial Supervisory Service, the volume of short selling in the stock market has averaged 3.15 trillion won in each month of this year, up from the 1.76-trillion-won monthly average in 2007. Short selling means selling securities the seller does not own with an intention to repurchase them at a lower price, in an attempt to gain profits by then selling the securities at a higher price.
The foreigners' selling spree has sounded the alarm about the South Korean economy, already struggling with soaring energy import costs and a global credit crunch. South Korea, the world's fifth-largest oil importer, is vulnerable to rises in energy prices because it imports almost all of its energy needs from overseas.
Higher import costs have led to a rapid rise in inflation. The country's inflation accelerated to 5.5 percent in June, the fastest pace in a decade, squeezing household incomes and corporate profits. Mounting inflationary pressure has forced the government to switch its economic policy focus to fighting inflation from promoting growth.
Earlier this week, the Asian Development Bank trimmed its forecast for South Korea's economic growth to 4.7 percent for this year from 5.0 percent set three months ago, far below President Lee Myung-bak's earlier promise of 7-percent growth.
Amid deepening gloom over the prospects of the economy, Finance Minister Kang Man-soo said the South Korean economy was in its worst trouble since the 1997-98 Asian financial crisis.
"Apart from exports, everything including investment, consumption, job growth and current account is showing trends similar to those seen during the financial crisis," Kang told parliament.
South Korea was compelled to go to the International Monetary Fund in December 1997 for a record US$58 billion bailout, to avoid a national debt default. South Korea's economy shrank 5.8 percent in 1998 in the aftermath. After years of painful restructuring, the country repaid the full amount of loans from the IMF in 2001.
A group of economists and the opposition party have called for Kang to step down for mismanagement of the economy to avoid worsening economic woes.
"The current economic crisis in South Korea resulted not only from global circumstances, including soaring prices of raw materials and the stagnant global economy, but also from the failure of our government to properly respond to the situation," a group of 118 economic and business scholars said in a joint statement.
