Chipmakers made money, but the neighborhoods got tighter. Profits at Samsung Electronics and SK hynix surged and large sums flowed into the stock market, yet the temperature of domestic demand tells a different story. Business closures reached 976,000 last year, and overdue loans to sole proprietors stood at 15.2 trillion won in the second quarter, up more than 13% from a year earlier. Employment in lodging and food services fell by 73,000 in August from a year earlier. A gap is widening between the boom at large exporters and the slump on the street.
It is not that money is scarce. The money supply has kept growing, and corporate cash reserves have in fact swelled. Net lending by non-financial corporations hit a record 67.1 trillion won in the second quarter, according to the Bank of Korea. Over the same period, net purchases of domestic stocks by households reached 67.2 trillion won, 3.7 times the previous quarter's figure. Net lending by households, by contrast, fell to 60.7 trillion won from 79.2 trillion won. Money has been released, but the force pushing it toward consumption is weak. It is time to examine where liquidity is heading rather than how much of it there is.
Normally, when stock prices rise, households with larger assets open their wallets and spending picks up. In South Korea, however, this wealth effect is unusually weak. The share of stock capital gains that flows into consumption is 1.3%, far below the 3% to 4% seen in major U.S. and European economies, according to a Bank of Korea analysis. Households that do not own a home were estimated to put about 70% of their stock gains toward buying one. Even gains from stocks become seed money for the next asset purchase rather than spending. Instability in home prices reinforces the pattern. Not only non-homeowners but also households that already own a home put off spending so as not to miss a chance to move up to a better one. The paradox is that rising asset prices foster a rush to accumulate instead of a wealth effect.
Chip cities show where the money goes more clearly. When the Bank of Korea examined Icheon, Hwaseong and Cheongju, monthly spending by residents rose as much as 4% compared with reference areas after large performance bonuses were paid. The trickle-down effect was clearly there. But the increase was concentrated in big-ticket items such as cars, home appliances, furniture and department store purchases. What stands out is the difference between Cheongju and Icheon, both home to workers who received the same SK hynix bonuses. The spending response was larger in Cheongju than in Icheon. In Icheon, funds tended to move into apartments in so-called "chip-belt" areas with good access to the greater Seoul region, such as Dongtan and Yeongtong in Suwon. Home prices in Icheon itself were weak. The same bonus split between spending and assets depending on where recipients lived. Even when companies release money, the force that spreads into domestic demand inevitably weakens if asset markets absorb it first.
A chip boom that lifted spending did not revive neighborhood businesses. Revenue per small business rose 4.53% from a year earlier in the second quarter, but costs climbed 5.83%. Profit growth came to just 0.85%. Skipping one meal out to buy one more share of stock is a rational choice for an individual. But the outcome changes when everyone defers spending. Falling restaurant revenue cuts into employees' jobs and suppliers' income, and they in turn close their wallets. It is a vicious cycle in which weak spending reduces income and falling income presses spending down again. The price of money bypassing the neighborhood does not, in the end, stay in the neighborhood.
Government policy also deserves a second look at whether it is following the flow of money. On one side, funds are channeled into the stock market; on the other, consumption coupons are used to prod wallets open. When home prices jump, lending is tightened to suppress demand. Each policy has its reasons, but a household has only one wallet. Handing a few tens of thousands of won to households that are cutting spending to keep pace with rising asset prices will not change their propensity to consume. The moment stock market promotion, property market stability and domestic demand stimulus are filed in separate policy boxes, the question of why money bypasses the neighborhood disappears from view.
Trying to fix weak domestic demand by releasing more money again is a problem. If additional liquidity flows into asset markets rather than productive investment and consumption, it can push asset prices higher still and signal to households that they should defer spending. What must be restored first is a virtuous cycle in which corporate profits feed investment, jobs and wages, and household income flows back into consumption. What is needed now is not releasing more money but finding where the money already released has stopped and what it would take to get it moving again.