Companies Accumulate Cash Instead of Borrowing... The Paradox of 'Capital Surplus' Driving Interest Rates Down

Corporations are transforming from 'capital deficit entities' that borrow money to invest into 'capital surplus entities' that accumulate cash. When the cash flow of corporations changes, the lending methods of banks also change, which is highly likely to eventually lead to a decline in medium-to-long-term interest rates.

Through 'Kim Young-ik's Economics School', Professor Kim Young-ik analyzed the changes in the capital circulation structure of the South Korean economy and suggested the possibility of a medium-to-long-term decline in interest rates. Professor Kim noted the trend where companies are accumulating cash instead of borrowing money from financial institutions.

Household Stock Proportion Reaches 34.4%... Recording an All-Time High

A distinct change appeared in the management of household financial assets in South Korea during the first half of this year. As stock prices rose significantly during the first half, the proportion of stocks within individual financial assets reached its highest level in history. As of the end of the second quarter, the proportion of stocks and investment funds accounted for 34.4% of the 6,930 trillion won in household financial assets. This is the highest figure among quarterly data since 2009.

Professor Kim explained, "As stock prices surged in the first half, a trend emerged where money kept in banks was withdrawn to buy stocks," adding, "This level significantly exceeds the past average stock proportion of 20.11%." However, he predicted, "Regret selling may occur due to the short-term surge, and there is a high possibility that the process of the stock proportion shrinking again will unfold through next year as stock prices undergo adjustment."

The United States market is also showing a similar trend. In the case of the United States, the proportion of stocks in household financial assets reached a historical high of 56.7% in the second quarter. Professor Kim added that U.S. stock prices also have aspects of being excessively overvalued, necessitating a future adjustment process.

The Transformation of Corporations: From 'Capital Deficit' to 'Capital Surplus'

The change that requires more attention than the movement of households is the cash flow of corporations. Typically, corporations act as 'capital deficit entities' that raise funds from financial institutions for investment. However, the funding situation of non-financial corporations in the second quarter of this year appeared to be the exact opposite. Corporate funds, which had a surplus of 20.8 trillion won in the first quarter, turned into a massive surplus of 67 trillion won entering the second quarter.

The cash and cash equivalents held by domestic companies currently amount to 1,136 trillion won as of the end of the second quarter. Professor Kim diagnosed, "It could be a temporary phenomenon due to the semiconductor boom, but the transition of companies into capital surplus entities is closer to a trend." This is also linked to the structural change where companies, wary of excessive investment since the 1997 foreign exchange crisis, have established conservative financial structures.

This change is also leading to an improvement in the household debt structure. Unlike the period after the '97 foreign exchange crisis when the proportion of corporate loans plummeted and household loans surged, recently, the financial health of households is showing signs of improvement, such as the asset-to-financial debt ratio dropping to 36% in the second quarter from a level that once exceeded 50%.

The Link Between Bank Bond Purchases and Falling Interest Rates

When companies stop borrowing loans and start accumulating cash, a new concern arises for the financial sector. This is because corporate lending, one of the main sources of income for banks, decreases. Professor Kim explained the mechanism of falling interest rates at this point. He stated that if banks cannot manage funds through loans, they have no choice but to invest the remaining funds in securities, especially bonds.

He explained this by citing the case of Japan in the 1990s. He mentioned the phenomenon where, as Japanese companies transitioned into capital surplus entities, the demand for bank loans plummeted, and as banks purchased large amounts of government bonds, Japan's government bond yields (interest rates) fell to the 0% level. Professor Kim analyzed, "An environment is being created where banks have no choice but to buy bonds as companies transition into capital surplus entities," and "In this respect, market interest rates are highly likely to decline in the medium to long term."

The outlook for slowing economic growth is also adding downward pressure on interest rates. While Professor Kim expects this year's economic growth rate to be in the mid-3% range, he predicted it could fall below 2% next year. He also raised the possibility that the potential growth rate could plunge below 1% within the next 5 to 10 years, emphasizing that the current rebound in interest rates is likely a temporary phenomenon within a long-term downward trend. Accordingly, he advised that interest in the bond market is necessary in the future.

Source: original video (YouTube)