Why investors like Moon

By John Burton

It is an irony that Korean presidents who are considered "leftists" have done more to promote market reforms than their conservative counterparts.

Kim Dae-jung embraced the recommendations of the International Monetary Fund in the wake of the 1997 financial crisis to become the country's most classically liberal president by ending trade restrictions, deregulating financial markets and allowing some of the country's biggest business groups to collapse rather than bailing them out with state funds.

His successor, Roh Moo-hyun, built on that legacy by increasing regulatory transparency, strengthening corporate governance and opening the market to more competition.

Now with the arrival of Moon Jae-in, investors -- particularly foreign ones -- are anticipating more market-friendly changes. The Korean stock market, which has been sluggish for years, has suddenly shown signs of renewed vigor.

Investors are hoping for an end to the so-called "Korean discount," whichmeans companies suffer lower market valuations than their performance would warrant because the founding families often place their own interests first before those of minority shareholders.

Leftist presidents have sought market reforms because they see them as the best way to limit the dominating economic power of the chaebol, which has been blamed for growing social inequality and the stifling of entrepreneurial ventures. In contrast, conservative presidents, beginning with Park Chung-hee in the 1960s, have generally favored state-led economic development that involves close cooperation with the chaebol.

Moon has made several moves welcomed by investors including appointing Kim Sang-jo, the famous "chaebol sniper," as head of the Fair Trade Commission (FTC) to fight collusion among the big business groups.

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The scandal that led to the downfall of Park Geun-hye has added momentum to Moon's chaebol reform agenda. For example, the state-run National Pension Service, which is the biggest single shareholder in many of Korea's leading businesses, is likely to play a more independent and authoritative role in policing the chaebol and pushing for higher dividend payments to investors.

The NPS has been put on notice that it needs to protect the interests of shareholders. The former health minister who oversaw NPS and a senior fund executive were recently convicted for approving the controversial 2015 merger of two Samsung subsidiaries that strengthened the hold of the founding Lee family in response to pressure from the Park administration.

Moreover, some of the chaebol are realizing that they can no longer resist the forces of change.Samsung Electronics announced in April that it would cancel outstanding treasury shares as demanded by foreign activist hedge funds to increase payouts to investors.

Moon can push ahead with reforms when economic conditions appear to be favorable due to a general improvement in global demand. Korea's semiconductor industry, for example, is booming because of the rise of big data and artificial intelligence.

But a note of skepticism is also warranted. Previous administrations have also pledged to break the close links between government and business to little avail. Moon will find that achieving some important reforms, such as unwinding the cross-ownership structures that keep the chaebol family dynasties in control despite minimal holdings, will be difficult to manage due to expected parliamentary opposition.

Moon's Minjoo Party has only 120 seats in the 300-seat National Assembly and it needs a three-fifths "supermajority" of 180 votes to pass major legislation. The president is unlikely to reach that goal. Even with the support of the liberal parties, the People's Party and Justice Party, Moon can only rely on 166 votes while the two conservative parties command 127 seats. He will have to live with this situation until 2020 when the next parliamentary elections are scheduled.

As a result, Moon will have to rely primarily on regulatory powers to curb the chaebol by enforcing anti-trust provisions, for example. How far he is willing to go in this direction remains to be seen. The vision as outlined by the new FTC head is a pragmatic one: not to disband or destroy the chaebol, but adopt a constructive approach in making them better. In addition, Kim acknowledged that at least some of the chaebol are already carrying out reforms, such as those related to cross-shareholdings, in response to public and investor pressure.

To improve Korea's economic performance, Moon must also confront the issue of labor market reforms. The president wants to raise the minimum wage and reduce the number of "contract" workers who lack basic social protections enjoyed by salaried employees.

Conservatives oppose Moon's proposals to spend more to create public sector jobs and reduce high youth unemployment, while also phasing out contract work, which opponents claim would make job creation more difficult.
Moon will find that reducing Korea's dependence on the chaebol will not be easy. But that is a situation that investors can live with as long as the big business groups perform more efficiently than they have done in the past.

John Burton, a former Korea correspondent for the Financial Times, is now a Washington,. D.C.-based journalist and consultant. He can be reached at johnburtonft@yahoo.com.