South Korea looks at Deutsche bank trade in Hong Kong
SEOUL: South Korean regulators concerned about volatility in their stock market are making a trip to Hong Kong for some answers.
South Korea's Financial Supervisory Service will send a team of officials to the Hong Kong branch of Deutsche Bank AG as part of an investigation into its involvement in the heavy selling of Korean stocks last month, according to Dow Jones Newswires.
The Korean regulator and the Korea Exchange are investigating selling that took place Nov. 11 when the Kospi Composite Index fell sharply in the last half-hour of trade. The index ended down 2.7% that day.
Deutsche Bank's Hong Kong office is mum on the reported visit and investigation. Spokesman Michael West declined to comment.
It isn't clear exactly what's behind the investigation. But it does highlight the challenges of investing in South Korea, which sometimes seems to act more like an emerging market than the developed market it wants to be.
This latest episode partially explains why investors have long given South Korean shares the cold shoulder. Company stocks in South Korea are valued well below companies in other Asian exporter economies. The Korean market overall trades at an average price-to-bookvalue of 1.5 times, according to Citi Investment Research. Hong Kong and Singapore trade at 1.9 times book value and Taiwan at 2 times. Thailand trades at 2.3 times book and Malaysia at 2.4.
Some of the Korea discount comes from investor fear of military and economic disruption emanating from nuclear-armed North Korea.
But there are also basic market concerns about corporate governance and what some might see as a heavy government hand overseeing market transactions.
Here's the background on the Deutsche Bank situation. According to the FSS, the Korean regulator, net selling by foreign investors on that day totaled 1.31 trillion won (US$1.18 billion), with Deutsche Bank's sales hitting 1.6 trillion won. Total selling overall was 3.613 trillion won.
There was an increase in computer-driven program selling that day. Nov. 11 also happened to be an options expiry day, a phenomenon that adds to volatility. On such days, options traders en masse closed positions on their contracts tied to Korean stocks. Regulators say they will be watching what happens this coming Thursday, the next options expiry day.
The investigators' visit to Deutsche seems to be just a part of South Korea's attack on market volatility. South Korean officials also said today they would boost supervision of the local derivatives market and may limit investors' holding of stockoptions after last month's sharp drop in the market. Individual investors are able to hold 5,000 futures contracts and institutions 7,000 at the moment.
Korean officials are also trying to keep down swings in the currency market, instituting capital controls that tax foreign investors' trades in certain domestic Korean assets. In November, for instance, the country unveiled proposals to reimpose taxes on purchases of local government bonds by foreigners. -PB News