SOUTH Korea, home to the world’s two-largest memory chipmakers, is in the midst of an artificial intelligence (AI)-fuelled exports boom. Generating wealth and keeping it at home isn’t the same thing, however.
Korea Inc is making a staggering amount of money this year. Samsung Electronics Co and SK Hynix Inc are among the world’s five most profitable companies, earning more than Alphabet Inc or Apple Inc.
Thanks to soaring memory chip prices, gross domestic income, a measure of the nation’s purchasing power, increased by 15.6% in the second quarter, far outpacing the 3.7% gain in gross domestic product.
But chronic capital outflows, which have haunted successive governments, are not going away.
A sizeable chunk of export revenue is kept offshore, according to Capital Economics, which looked at deposits data in South Korea’s financial account for clues.
In June, the government asked major exporters to repatriate funds held overseas to stabilise the South Korean won.
The main factors that contributed to money leaving the country are still present. Retail investors have flocked to the Nasdaq, developing a taste that first took hold during the meme stock craze in late 2020.
They briefly sold their overseas holdings earlier in the year, but re-entered the US market in June, piling into leveraged semiconductor exchange-traded funds.
While less risk-loving than mom-and-pop traders, South Korean companies continue to invest abroad.
SK Group has promised to put in a “much, much bigger” amount than the US$35bil it has committed to in the United States, while Samsung Group is also expanding manufacturing capabilities there. Still, the White House is pushing for more.
At home, though, there are worries that retail traders will abandon the Kospi for good after last month’s rout, returning to a perception long-held before the AI fever hit that the South Korean market is a value trap.
Meanwhile, business sentiment is fragile. Private-sector investments fell in 2024 and 2025.
In other words, South Korea has the same kind of dilemma as its north Asian neighbours, Japan and China.
The vast wealth created from its industrial success is recycled overseas – through foreign direct or portfolio investments – and doesn’t necessarily translate into deeper equity markets, higher asset valuations, or a broad-based economic boom at home.
President Lee Jae Myung’s administration is certainly doing what it can to address structural problems.
Vowing to make a “great leap forward”, the government has unveiled public-private partnership projects in the less-developed southwest region, with SKHynix and Samsung Electronics each promising to deploy about 400 trillion won (US$260bil) in new chipmaking factories.
It’s injecting fresh capital into sovereign wealth funds for strategic investments in AI infrastructure.
Last month, Seoul introduced 24-hour trading of the South Korean won to facilitate transactions at a level comparable to Group of 10 currencies.
South Korea is one of the world’s largest exporters, but its currency accounts for only 1% of global foreign-exchange turnover, according to Deutsche Bank.
Big question marks remain, however. Economists worry about the day the AI boom runs out of steam.
The strength of South Korea’s export revenue comes mostly from soaring prices rather than volumes, so what would happen if Chinese competitors flood the market and drag down the entire industry’s profitability?
Will Korea Inc suffer from over-investment?
Nonetheless, the government is wise not to waste the big fiscal windfall on socialist wealth transfers, instead leveraging state money to tease out domestic investments.
After all, South Korea is a functioning democracy and Seoul can’t take a page out of Beijing’s playbook, which simply cracks down on cross-border stock investments and traps its capital at home as a way to develop domestic equity markets.
For South Korea, improving business sentiment is the only way. — Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
