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Thu, May 02, 2002 - Page 19 News List

The best news in South Korea is the bad news

By William Pesek Jr  /  BLOOMBERG , TOKYO

South Korea is basking in some stellar news this week. Along with strong economic growth, the government's epic struggle to sell off parts of Daewoo Motor Co is bearing fruit.

Yet the best news coming out of South Korea these days may be in the bad news. Take last week's market reaction to a move by LG Group founding family members to shuffle its shareholdings. The move spooked investors who had been piling into shares of South Korean business groups amid hope they were cleaning up their acts.

Here's what happened. LG Chem Ltd bought a 14 percent stake in affiliate LG Petrochemical Co from LG Group founding family member Koo Bon-joon and other family members last Thursday. The purchase price was significantly higher than LG Petrochemical Co's closing price that day.

The transaction seemed reminiscent of the kinds of shareholder-unfriendly backroom dealings that flourished before the 1997-1998 Asian financial crisis. In years past, South Korean conglomerates often bought and sold shares among their units to enrich the founding families at the expense of less-connected shareholders. LG denied that was the motive.

Investors disagree. "The LG Chem deal is just another reminder that deals which do not favor minority investors are not a thing of the past," Sulia Lo, a senior portfolio manager at Citibank Global Asset, told Bloomberg News. "Corporate governance issues have always been at the back of investors' minds when investing in Korea."

Now for the good news: The stock market tanked following the transaction. LG Chem Ltd shares lost a quarter of their value last Thursday following news of the transaction. Damage broadened to the entire stock market. LG's maneuvering sparked the biggest drop in South Korea's Kospi index -- 4.7 percent -- in more than four months.

Four years ago, LG's stock transaction wouldn't have raised many eyebrows among investors. Same-old, same-old, they might've thought. In the years since the Asian crisis, however, Seoul has taken important steps toward improving corporate governance. In selling shares aggressively last week, investors sent a message to Corporate South Korea: Your dodgy business practices are no longer acceptable.

To be sure, Korea has a long way to go in improving corporate transparency. No one should assume that in less than five years, South Korea's business dealings would be 100 percent clean. But anyone who thinks Korea Inc is no different than the one that dominated the economy a few years ago isn't looking close enough.

The stock market's 22 percent rally this year is but one indication investors realize South Korea has cleaned up its act. Looking around the global economy, a growing number of investors are seeing South Korea's as the market to be in this year. Foreign investors, fed up with Japan's malaise and volatility in the US, have funneled into the nation's capital markets with an enthusiasm rarely seen.

Slowly but surely, the dynamic has been chipping away at the so-called "Korea discount," a phenomenon whereby international markets undervalue companies. To many investors, Korea Inc lacks transparency and adequate corporate governance. Such concerns mean that even highly profitable South Korean companies can have smaller stock-market capitalizations than similar ones in other countries.

Investors increasingly are coming to the view that Seoul is in fact whittling away at the Japan-style business practices.

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