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Record Bond Buys by Foreigners OK: S. Korea

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Despite the fact that it experienced record capital outflows in 2008, South Korea has no plans to halt record purchases of its bonds by foreign investors, and will also sell 30-year bonds that are aimed at investors from outside the country.

Bloomberg reported Sunday that, according to the Financial Supervisory Service, a record 88.5 trillion won ($78 billion) in South Korean bonds were held in March after the figure was boosted by investor funds from outside the country. In addition, the government had announced in January plans by its finance ministry to sell 30-year bonds beginning in September. It hopes to raise 400 billion won each month through those sales.

Shin Hyung Chul, director general of the treasury bureau at the Ministry of Strategy and Finance, said in the report that the foreign investment level was “manageable” and the country does not plan to restrict it. In fact, the government intends to “gradually increase” the issuance of securities that take ten years or more to mature so that it can stabilize its fundraising.

Shin was quoted saying, “Foreign investors, especially insurers, have shown keen interest in the 30-year notes, and we expect the sale to be done smoothly. Overseas central banks including Norway and Switzerland have entered the South Korean debt market recently, and these moves reflect their positive views on the Korean economy.”

Kong Dong Rak, a Seoul-based fixed-income analyst at Taurus Investment & Securities Co. in Seoul, said in the report, “Foreigners’ investment pattern in Korean bonds had been short-term focused, targeting interest-rate differences, but this seems to be changing with more long-term funds entering the market.”

In a client note, Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Plc, wrote last month that authorities are concerned about capital flows, since they can quickly reverse, and are considering whether the measures imposed so far are sufficient. In January 2011, the government reinstituted an interest income tax of as much as 14% on treasury bonds held by foreigners, in addition to a 20% capital gains tax on their sale.


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