Companies Accumulating Cash After Taking Out Loans

March Corporate Cash Assets (M2) 820 Trillion
Largest Ever Since 2001 Statistical Compilation
Increased by Over 30 Trillion in One Month

March Bank Corporate Loans 18.7 Trillion, April Up to 27.9 Trillion
Most Loans Not Used, Just Accumulated

Investment Difficult Due to Economic Slowdown
"Likely Used for Corporate Bond Refinancing, etc."

[Asia Economy Reporter Kim Eunbyeol] Companies are taking out loans and accumulating cash to prepare for the novel coronavirus disease (COVID-19) crisis. Considering the difficulties caused by COVID-19, the government is supplying liquidity, and since loans are available at low interest rates, a "let's just take it for now" atmosphere has emerged. The uncertainty about how long the economic crisis will continue is also a reason why companies are eager to secure cash.

According to statistics from the Bank of Korea on the 14th, the amount of cash-equivalent assets (M2, average balance, seasonally adjusted series) held by companies in March reached 819.9724 trillion won, an increase of about 30.43 trillion won compared to the previous month (789.535 trillion won). This is the largest scale since the statistics compilation began in December 2001. It is very unusual for companies to increase cash-equivalent assets by 30 trillion won in just one month, which is 1.78 times more than the M2 increase of 17.06 trillion won in February 2009, right after the financial crisis.

M2 is a broad monetary indicator that includes cash, demand deposits, and checking deposits (all M1), as well as money market funds (MMF), and short-term financial products such as time deposits and savings deposits under two years. It can be understood as a figure that includes products that can be relatively easily converted into cash. These are products that can be exchanged for cash at any time if only the interest is forfeited. Long-term products over two years are excluded due to lower liquidity. Ultimately, this means that the amount of "money that can be converted into cash at any time" held by companies increased by 30 trillion won in just one month. Bang Joong-kwon, deputy head of the Bank of Korea's Financial Statistics Team, explained, "Funds flowed significantly into demand deposits and savings deposits due to companies' efforts to secure liquidity amid COVID-19 and government policy financial support."

The means by which companies secured cash was through loans. According to the "Financial Market Trends" announced by the Bank of Korea last month, corporate loans (in Korean won) increased by 18.7 trillion won in March alone. The scale of corporate loan increases was the largest since June 2009. Loans to large corporations increased by 10.7 trillion won, loans to small and medium enterprises increased by 8 trillion won, and loans to individual business owners increased by 3.8 trillion won. This means that the loans provided as support due to the increase in companies affected by COVID-19 are currently in a standby state as cash-equivalent assets. The balance of corporate loans last month was 929.2 trillion won, an increase of 27.9 trillion won compared to the previous month. The increase amount set a new record for the largest scale since the statistics compilation, following March.

However, it is difficult to criticize companies for not investing at all by looking only at March. A financial sector official explained, "Since this is an emergency period, companies are expected to accumulate cash and use it for refinancing corporate bonds, etc. Because they experienced a contraction in the corporate bond market in March, companies seem to have left the loan money in their accounts as is." The biggest concern for companies is that the financial market suddenly worsens, causing a credit crunch. This is why the Bank of Korea, the government, and the Korea Development Bank are creating special purpose vehicles (SPVs) and preparing programs to purchase lower-rated corporate bonds in emergencies.

It seems unlikely that corporate investment sentiment will easily revive. According to the Business Survey Index (BSI) compiled by the Bank of Korea, the BSI for overall industrial business performance last month was 51, the lowest level since the financial crisis. The BSI for manufacturing facility investment execution fell to 80. Professor Kim Sangbong of Hansung University said, "Although corporate investment may relatively increase because it decreased significantly last year, it is not an overall increasing trend. Large corporations accumulate cash-equivalent assets without taking out loans, while lower-tier companies take out additional loans, creating a polarization phenomenon." He added, "Ultimately, policy and institutional reforms will be necessary to induce corporate investment, including reshoring (the return of manufacturing to the home country). The reason companies went overseas was due to labor cost issues."

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