The government has introduced various policies to redirect foreign investment funds to the domestic stock market, but their effectiveness is waning. As the tax benefits for domestic market return accounts (RIA) are gradually reduced and the domestic stock market experiences a sharp decline, individual investors are once again turning to the U.S. stock market.
According to the Korea Securities Depository, the net purchase amount of U.S. stocks by domestic investors from August 1 to 10 reached $716.48 million, surpassing the net purchase amount of $632.95 million for the entire month of June. This year, net purchases of U.S. stocks by domestic investors have continued monthly, except for April and May, with a significant surge in July, reaching $4.64241 billion.
The widening gap in returns between domestic and international stock markets is cited as a direct reason for this trend. While the domestic stock market has recently faced sharp declines and high volatility, the U.S. market has performed relatively well, leading investors to prioritize returns over tax benefits. If higher returns can be expected from U.S. stocks despite the taxes, there is little incentive to shift funds back to the domestic market.
Evidence of the diminishing effectiveness of RIA policies is also apparent. According to the Korea Financial Investment Association, the RIA balance at the end of last month was 21.292 trillion won, a decrease of 5.268 trillion won from the previous month. This marks the first monthly decline since the RIA was launched in March. Monthly net inflows increased from 4.14 trillion won in March to 9.249 trillion won in April and 12.450 trillion won in May, but plummeted to 721 billion won in June and turned negative in July.
The issue is that the tax incentives for RIAs are set to weaken further. The RIA, which offers capital gains tax reductions for investments in domestic stocks after selling overseas stocks, initially had a 100% deduction rate, which was lowered to 80% in June and July, and will be reduced to 50% from this month until the end of the year. As the most robust tax benefits are gradually diminished, the incentive to redirect funds to the domestic stock market is inevitably weakened.
Similar controversies have arisen regarding the ISA reform plan. The government has proposed the establishment of a 'productive finance ISA' for investments in domestic stocks while abolishing the carryover of existing ISA contribution limits and limiting the contract period to a maximum of five years. However, there has been significant backlash from investors who prefer domestic-listed overseas index ETFs, leading President Lee Jae-myung to order a comprehensive review of the reform plan.
Industry experts point out that the government has repeatedly created new systems to retain domestic investment funds while reducing existing benefits, only to revise them in response to backlash. They argue that there are limitations to changing the flow of investor funds through adjustments to tax benefits or investment restrictions rather than enhancing the competitiveness of the domestic capital market.
The policy on leveraged products can also be viewed in this context. The government introduced single-stock leveraged products to enhance the competitiveness of the domestic leveraged product market and absorb diverse investment demand. However, citing market overheating and loss risks, the launch of new single-stock leveraged products has been temporarily suspended, and the minimum deposit requirement has been raised from 10 million won to 30 million won, tightening regulations.
Ultimately, experts argue that what is needed to expand domestic investment is not a patchwork approach that complicates overseas investment or adjusts existing benefits. Instead, there is a need to enhance the fundamental investment appeal of domestic companies through growth potential, shareholder returns, and market stability.
A financial investment industry official stated, "If the domestic stock market offers more attractive returns than the U.S. market, individual investors' funds will naturally return without the need for tax incentives. It is essential to strengthen the fundamental competitiveness."
* This article has been translated by AI.
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