Caught in a Liquidity Trap...? Large Corporations Accumulating Cash vs. SMEs Facing Funding Shortages: 'Financing Polarization'

Recession, Stock Market Slump, Real Estate Regulations Lead Large Corporations to Hoard Cash Without Investment Destinations
SMEs Face Funding Shortages Due to Bank Loan Restrictions... Non-Bank Loans Increase by 21% in 10 Months

[Asia Economy Reporters Haeyoung Kwon and Minyoung Kim] The accumulation of corporate funds deposited in banks is interpreted as directly linked to the recent economic situation where there are few suitable places to invest internal reserves. As domestic and international economic conditions become uncertain, companies are reducing facility investments and selling real estate to accumulate cash assets. Despite the monetary authorities injecting money, the money does not circulate in the market, causing a 'money stagnation' situation, and financial difficulties are worsening mainly for small and medium-sized enterprises (SMEs). As investment sentiment among companies shrinks due to the economic slowdown outlook, the impact on SMEs is inevitable. Individual funds are also unable to flow into any particular area such as the stock market or real estate. There are concerns that funds circulating in the market may find regulatory loopholes and flow into real estate at any time amid this liquidity trap.

◆Recession, stock market sluggishness, and real estate regulations leave money with nowhere to go= The biggest cause of money stagnation, where money does not circulate in the market despite monetary authorities injecting funds, is the economic downturn. The prolonged US-China trade dispute has led to continued sluggishness in the manufacturing sector and investment, accelerating the domestic economic recession. Increasing external uncertainties such as Japan, North Korean nuclear risks, and the Iran situation are also cited as reasons why companies are holding back.

According to Statistics Korea, the domestic facility investment growth rate turned negative at -4.8% in Q2 2018 and has recorded negative growth every quarter since. Last year, it was -19.6% in Q1, -8.7% in Q2, -3.7% in Q3, and negative growth is expected in Q4 as well. This year's economic situation is not promising, making it difficult for market funds to lead to investment or consumption. The Bank of Korea forecasts this year's economic growth rate at 2.3%, and the Ministry of Strategy and Finance at 2.4%, but some private institutions predict growth as low as 1.8%.

SMEs and individuals also find it difficult to find new investment destinations. Due to worsening domestic and international economic conditions, it is difficult for funds to flow into the stock market. Demand for financial investment products has also significantly decreased following last year's major overseas interest rate-linked derivative-linked securities (DLS) incident, which caused large losses to investors sold by banks. Real estate has turned into a wait-and-see mood due to government regulations.

A representative from a commercial bank said, "Small and medium-sized corporations also put tens of billions of won into financial investment products such as DLS and suffered losses," adding, "As a result of the DLS impact, not only individuals but also corporations are locking up their surplus funds in time deposits or liquid funds rather than investment products."

◆Large corporations with nowhere to spend money and financially struggling non-prime SMEs= While large corporations are accumulating funds in banks, non-prime companies, mainly SMEs, are struggling even to obtain bank loans. According to data compiled by the Bank of Korea, corporate loans from non-bank financial institutions increased by 21.1% from KRW 165.6571 trillion in December 2018 to KRW 200.7385 trillion in October last year. During the same period, corporate loans from deposit banks increased by only 5.3%, from KRW 861.0361 trillion to KRW 907.0664 trillion. Non-bank financial institutions include savings banks and Saemaeul Geumgo, mainly used by SMEs that cannot get loans from banks. The increase in high-interest loans from the secondary financial sector, which has much higher interest rates than banks, indicates that SMEs' financial difficulties and borrowing conditions have worsened. With this year's economic outlook still bleak and banks tightening soundness management, it is expected that SMEs' financial conditions will deteriorate further, increasing the number of marginal companies.

Amid the polarization of corporate funding, some analysts diagnose that money held by some companies and individuals with no suitable investment destinations is likely to flow into real estate, considered a safe asset.

Professor Sangbong Kim of Hansung University’s Department of Economics said, "Market funds should be going to investments in SMEs or venture companies, but both individuals and corporations are flocking to real estate by buying land and buildings," adding, "Both companies and households already own real estate or are holding liquid funds for real estate." Researcher Wanjung Kim of Hana Financial Management Research Institute predicted, "Surplus funds that cannot find suitable investment destinations may re-enter the real estate market," and noted, "Despite ultra-strong housing market regulations such as the 12.16 measures, the expansion of social overhead capital (SoC) budget execution, including construction investment to boost economic vitality, could act as a factor increasing capital inflow into the real estate market."

This content was produced with the assistance of AI translation services.