» Citizens are looking at a bird’s eye view of an apartment complex blueprint at model homes in the Cheongra neighborhood located in Incheon city, May 5.

In South Korea, within just a year after the financial crisis began last September a boom of speculation is again erupting. While the South Korean government has provided liquidity and lowered rates, funds are not flowing into the real economy and are instead being seen in the stock and real estate markets. Liquidity is turning into short-term hot money, hovering only around speculation markets.

According to the Financial Supervisory Service and the Bank of Korea, the short-term liquidity passed the 800 trillion Won mark at the end of April, up 91.8 trillion won from the end of last September when the liquidity marked 719.5 trillion Won. Short-term liquidity refers to idle money which is put into demand deposits, time deposits with a maturity of less than six months, and money market funds, among others.

While short-term liquidity is abundant, the interest rates are at the lowest ever. The key interest rate of the Bank of Korea is 2 percent, and the interest rate of the 1 year fixed deposit of Kookmin Bank, the largest bank in Korea, is 3.3 percent at best.

As the real interest rate adjusted for inflation is negative and the optimistic view that the economy has turned around is spreading, a lot of money in the market is rushing to investments, even if those investments are a little risky.

When Hynix, a semi-conductor company, offered common shares in the Korean and international capital markets on May 13 and May 14, it attracted about 25.83 trillion Won. It is the biggest in the history of inviting the public to new stock in South Korea.

More than 30 thousand people flocked into the Posco E&C apartment houses‘ sale in Songdo, Incheon. The ratio was 59.9 to 1. The apartment houses sale caused speculation investment because authorities cut the real estate transfer income tax and imposed only a 1 year resale restriction on it. Many real estate brokers tried to intercede on illegal dealings and resale of the apartment houses.

Many investors are investing in stocks with borrowed money. The stock companies’ balance of credit loans has grown to 3.73 trillion Won as of May 15, exceeding the previous level of the financial crisis. At the end of last October, the balance of credit was at 1.1 trillion Won.

Hah Joon-Kyung, professor at Hanyang Univ., says, “If the government is reluctant to shrink the liquidity because it would be an obstacle to revive the real economy, it must impose strong regulations to let the money flow into productive sectors including companies‘ investments.” He emphasized, “Low interest rates and excessive liquidity always cause bubbles if you do not pull on the reins.”

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