Korea is hot in shadow of spotlight on China, Bloomberg reports

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Korea is hot in shadow of spotlight on China, Bloomberg reports

September 26, 2005


Although the world's attention is directed to China when it comes to the economy, potential foreign investors were advised to take note of the Korean economy, given its potential as well as signs of recovery, albeit incremental, for the last few months.

With this advice, Bloomberg's columnist William Pesek Jr. in his column under heading "Korea is hot in shadow of spotlight on China" on Monday (Sept. 26) also cautioned against Koreans to grow wary of foreign funds since such practice may slow foreign direct investment.

Following are excerpts from his column:

Anyone who kept their eyes on the bigger picture is reaping the rewards. The KOSPI index is up 31 percent this year, as more and more investors realize Korea isn't the basket case some thought. It's among Asia's best-performing stock markets this year.

Korea still has its problems. Steps to deregulate the economy need to be accelerated to compete amid China's rise. The private sector must step up efforts to improve corporate governance and become more transparent. Households are still paying off the high levels of debt built up in recent years. Higher oil prices pose a risk to growth.

That hardly means this year's stock rally is baseless. For one thing, households that just two years ago were downing in debt are beginning to spend again. For another, North Korea is expressing greater openness to the idea of shelving its nuclear weapons program. Any resulting peace dividend may help Korea's equities markets and its credit ratings.

The question is whether Korean stocks can rise more? Yes, so long as politicians and executives use today's window of opportunity to modernize the economy. It's also important that they reaffirm Korea's openness to foreign capital and ideas.

After years of sluggish growth, Korea's central bank predicts 4.5 percent growth in the second half of 2005, up from 3 percent in the first six months. That may seem slow compared to the 10 percent growth rates of a decade ago, when Korea was an emerging market country.

The key is convincing investors Korea that is on top of structural impediments to faster growth. Doing so might go a long way toward helping move beyond what might be called pendulum economics, or the tendency of investor sentiment on Korea to swing wildly from heady optimism to dark pessimism.

Today's growth gives Korean leaders a chance to accelerate those changes and devise new ones to harness the nation's well-educated population of 48 million. It's also a time for leaders to convince Koreans that their economic future will be very different from the past. China's cheap labor means Korea's advantage no longer is in manufacturing, but in technology and other intellectual pursuits.

Korea has come a long way since the dark days of 1997 and 1998, when growth plunged amid Asia's financial crisis. Banks are healthier, foreign-currency debt was reduced, the family-owned conglomerates that towered over the economy have been reined in and currency reserves are around $200 billion.

Besides, Korea is, well, cool. Actors like Bae Yong-Joon and singers like BoA are taking Asia by storm, creating a lucrative global industry for cultural exports. The economic ripple effects of what Asians call the Korean Wave continue to multiply and offer new growth opportunities.

With the world warming to Korea, officials in Seoul would be wise to reciprocate. Yes, Korea's economy is an open one by international standards. That openness left its vulnerable to the whims of markets in the late 1990s. Since then, polls show Koreans have grown wary of outside influence.

Recently, there's been pressure to steer stakes in state-owned assets away from foreign funds by finding domestic buyers. The risk is that such practices slow foreign direct investment. Korea is better equipped now than a decade ago to withstand global economic currents and utilize foreign capital productively. Admitting that would be a sign of confidence, not of weakness.

Investors are rediscovering Korea, and for good reason. So long as the government doesn't foul things up, there's little reason to think its economy can't turn in even more impressive results.


 

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