Study: Koreans Keep Less Cash at Home

Study: Koreans Keep Less Cash at Home. July. 28, 2006 03:45. by Sang-Hoon Kim legman@donga.com sanhkim@donga.com.

According to predictions from the Bank of Korea, the total amount of cash that Koreans have stashed at home, which increased to as much as 1.0 trillion won in 2000, 1.6 trillion won in 2001, and 1.7 trillion won in 2002, is now on the decline by 300 billion won in 2004 and nearly none last year.

What is the reason behind the drop in the stashed money that has long served as a great monetary source for many working class Koreans when financial institutions were out of their reach?

A widely held view is that the reduction in many households’ real income has led to less extra cash readily available at home.

Min Tae-hyeong, a sound instrument company worker aged 33, ran out of extra cash besides minimum living expenses, as his income froze for almost two years. Last month, he was behind on his monthly rent. He said that he had to use 300,000 won he had saved in his bed for a rainy day over a year.

Moreover, people do not need to hoard cash, because they have other means of payment, such as credit cards. The rate of cash usage in consumer spending accounted for a meager 4.7 percent in 2004, the lowest level since 1970.

A private money lender who goes by the surname Park hinted that even in the private loan market, almost all cash transactions such as payments of loans and interests are made on mobile banking.

New lucrative financial products also fueled this trend. As of late June this year, private funds run by asset management companies amounts to 222 trillion won, up 84 trillion won from the end of 2000.

Many are reluctant to stash cash in their houses, too. Especially those in their 20’s and 30’s stay away from the conventional way of saving money in the bed.

A full time home maker, Kang Hye-young, 31, puts money right into her bank account, whether it is left after shopping or comes from moonlighting, if the cash nears 100,000 won or about 100 U.S. dollars. Kang says that she could not remember where she would have put money even if she stashes it somewhere in her house.

Analysts, however, point out that much of the money that came out into the market that way has not circulated enough to contribute to economic growth.

That is mainly due to the slowdown in money circulation with reduced financial and commercial transactions among key economic players, including banks, corporations, and the government.

The Bank of Korea said that in the first quarter of this year a currency unit was used in business transactions only 0.799 times, an all time low since 2000. The unit is frequently used in a boom time, and used less during an economic slump.

The lower rate of currency trade signals that extra cash stashed at home remained stationary after having gotten into banks or asset management markets, or flooded into foreign capital markets.

Meantime, banks build up the money at their depositories citing firms unwilling to make investments, while asset management companies prefer foreign investment destinations such as India and China to the domestic market.

Lee Ji-pyeong of the LG Economic Research Institute says, “Money, supposed to flow into the real economy, such as in facility investment, construction, public works, is staying in the financial market. This is symptomatic of an aging society.”

Focus on Potential Industries-

Economic experts assert that banks must put an end to their age-old conglomerate-oriented lending practices for the money from Korean households to be constructively utilized. In other words, financial institutions should extend loans to SMEs with enormous growth potential rather than helping already cash-abundant conglomerates.

Sohn Min-jung of the Samsung Economic Research Institute said that, in order to tap the fund tied to properties or overseas assets, the government should take the lead by investing in biotechnologies or environmental technologies and induce private firms’ participation.

Ahn Jae-uk, an economics professor at Kyunghee University, advised that easing real-estate related regulations and promoting corporate investment in the construction industry will help increase cash flow.