Updated April. 03, 2014 01:29
The government is trying to bring cash stacked in company coffers to the market because companies are the only source of fund that could increase liquidity in the market amid insufficient government finances and sluggish growth of household income. The government expects that if companies that have accumulated ample cash reserves due to uncertain global economy seek to find new investment opportunities or increase dividend payouts, it would give a boost to the overall economy.
According to the Bank of Korea, cash reserves held by all companies including state-run firms amounted to 503 trillion won (476 billion U.S. dollars) as of January. The figure represents a gain of 27 trillion won (26 billion dollars) year-on-year. Fund amounting to 1.4 times the government budget for this year (358 trillion won or 338 billion dollars) are being locked in company coffers. Looking to situation of the 30 largest conglomerates that retain especially larger cash reserves, cash and short-term deposits possessed by 171 listed companies affiliated with major business groups amounted to 158 trillion won (149 billion dollars) as of the end of last year. Companies keep ample cash reserves because they have focused on holding cash-like assets rather than making investment, judging that it is difficult to predict economic situation due to the U.S.s tapering of its quantitative easing and Japans policy to depreciate the yen currency. The government is concerned that companies possession of excessive cash could result in a contraction in investment, which in turn could weaken competitiveness of the nation.
Amid this situation, the government is discussing in details two different policies to bring cash possessed by companies, namely promotion of corporate investment or dividend payment.
The measure to increase by around 1 percentage point the ratio of tax deduction for investment, which is applied when companies make investment using their cash-like assets, is being considered as priority since it could generate the virtuous cycle of "expansion in corporate investment -> creation of more jobs -> expansion of household income -> expansion of government finances -> economic growth." However, since there is no label showing the source of funds, verifying the source of investments has emerged as a pending task to address. If companies make investment with debts and write their balance sheets that suggest a reduction of their cash-like assets, the government can hardly discover this. A government source said, The policy is in right direction, but it requires further study to implement the policy, adding, This will be adequately discussed in the process of preparing a plan to revise the tax policy this year.
The policy designed to induce companies to pay dividend is less of priority than the policy to induce investment with cash. Given the situation that foreigners hold as much as 32 percent of outstanding shares in the Korean stock market, if companies hike dividends, it could spawn controversy over outflow of national wealth, while high-income earners who will benefit more from expansion of dividend payout could accumulate the fund all over again, rather than spending. Despite this, considering that the portion of cash dividend relative to ordinary net profit at Korean companies is significantly low, the government judges that dividend payment needs to be promoted to the extent that would minimize side-effect. The ratio of cash dividend paid by listed Korean companies between 2005 and 2011 amounted to 22 percent, which translates into less than half the level (49 percent) in advanced countries, including the U.S., Japan and the U.K.
Chances are high that these measures to give tax deduction or induce payment of dividend will be only concentrated on electronics, automotive companies, and certain conglomerates. As many manufacturing companies and small businesses displayed sluggish performance last year, they have limited cash reserves.