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With China’s surprise devaluation of the yuan and hints of an interest rate hike in the US increasing financial uncertainty among emerging economies, the flight of foreign capital from the South Korean financial market is accelerating.

As emerging countries in Asia - including Malaysia, where there is talk that plunging currency values could lead to a foreign exchange crisis - pull large amounts of money out of South Korean securities, there are concerns that the financial instability affecting these countries could spread to the South Korean financial market.

According to figures on July trends in foreign securities investment announced by South Korea’s Financial Supervisory Service (FSS) on Aug. 18, foreign investors let go of 4.88 trillion won (US$4.11 billion) worth of stocks and bonds in the South Korean securities market in July. This is the biggest amount since Aug. 2011, when foreign investors pulled 5.8 trillion won (US$4.89 billion) out of the market.

In June, foreigners sold 389 billion won worth of domestic stock, and in July, there were net sales of 2.26 trillion won. This was the highest amount of net sales since June 2013 (5.1 trillion won). With uncertainty increasing overseas, including fears about an interest rate hike in the US, the won-dollar exchange rate shot up, which apparently led foreign investors concerned about a loss in exchange to join the ranks of sellers.

After China allowed the yuan to weaken this month, foreigners began to sell securities at a faster clip. By Aug. 18, net sales by foreigners had reached 1.3 trillion won. With the foreign selloff continuing through Aug. 18, the KOSPI index finished at 1956.26 points, down 12.26 points (0.62%) for the day.

Meanwhile, the KOSDAQ index concluded trading at 699.80 points for a decline of 22.21 points (3.08%). This was the first time that the bourse was below 700 at the close of trading in two months, since June 3 (696.97).

Foreigners also let go of 2.62 trillion won in the South Korean securities market last month, maintaining a net outflow for the second month in a row. The amount of the outflow last month was the greatest since Dec. 2011 (3.9 trillion won).

The countries that led sales in domestic securities last month were Thailand (-1.25 trillion won), the US (-565.1 billion won), and Malaysia (-296.2 billion won).

During the first seven months of this year, Malaysia led the way in selling off investments, liquidating a total of 2.92 trillion won in securities. Thailand pulled out the second great amount of funds over the same period, amounting to 1.34 trillion won worth of securities.

As financial instability spreads in Malaysia - with the Malaysian ringgit falling by 15.2% so far this year, the biggest drop of any major Asian country - the country appears to be pulling out money it had invested in South Korea and other countries in order to reinforce its foreign reserves.

“If the US begins to raise interest rates, the situation is likely to get even worse. Malaysia still holds more than 4 trillion won of South Korean securities, which means there is plenty of room for more outflow. If financial instability in Malaysia becomes more severe, the South Korean economy and financial market will also be affected both directly and indirectly,” said a source at the Korea Center for International Finance.

South Korea was also identified as one of the countries at risk of being exposed to a currency crisis as a result of the devalued yuan. Bloomberg News reported on Aug. 17 that investment bank Morgan Stanley had included South Korea on its list of the “troubled ten,” referring to 10 countries that are expected to face difficulties because of China‘s adjustment of its currency.

“South Korea is in an awkward position. It needs economic growth in China in order to increase its exports to China, but if the value of the yuan decreases, it will become harder to complete with China in exporting to other countries,” said So Jae-yong, a researcher with Hana Daetoo Securities.

“Since there is still a possibility of the yuan being devalued even more, for the time being we need to wait and see whether the Chinese economy will bounce back,” So said.　

By Kim Su-heon, Hong Seok-jae and Kim Hyo-jin, staff reporters　

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