Korean Stocks Drop on Bank Levy, Risk of Conflict With North

South Korea stocks dropped after the government proposed tighter curbs on capital flows and military tensions with the North damped demand for the nation’s assets.

A levy is planned for foreign-currency borrowing by banks, the government said yesterday. South Korea commenced with a live-firing drill on Yeonpyeong Island today, a month after North Korea shelled the island close to the disputed sea border off the peninsula’s west coast, killing four people.

“The government finally announced details of the levy and it could tighten dollar liquidity in the market,” said Frances Cheung, a senior strategist at Credit Agricole CIB. “The military drill may trigger strong retaliation from the North.”

The benchmark Kospi stock index fell as much as 1.5 percent before closing 0.3 percent lower at 2,020.28. Stocks pared losses after Agence France-Presse reported North Korea has agreed to allow United Nations nuclear inspectors to return to the country, citing a CNN report.

The government said yesterday it aims to apply a levy on banks’ foreign-exchange borrowings, will strengthen punishment for inappropriate reporting of currency trades and may tighten rules on derivatives. It is considering a 20 basis-point levy on overseas debt maturing in less than one year, Vice Finance Minister Yim Jong Yong said.

Nations from China to South Africa are striving to limit currency volatility as near-zero borrowing costs in advanced economies spur demand for higher-yielding assets in emerging markets.

Artillery Exercise

Posco, a steelmaker and the second-biggest company by market capitalization on the Kospi, fell 1 percent to 469,000 won. Hyundai Mobis Co., an auto-parts maker and the nation’s fifth largest company, slipped 0.2 percent to 297,500 won, a three-week low.

Artillery positions on Yeonpyeong Island began the exercise at 2.30 p.m. local time after fog cleared, said a defense ministry official who declined to be named, citing government policy. An emergency meeting of the United Nations Security Council failed to agree on steps to ease tension on the peninsula. Russia requested the meeting, saying the Security Council “must send a restraining signal” to both countries.

“Geopolitical risks boost uncertainties after South Korea said it will proceed with a live-firing drill and the UN failed to agree on steps to ease tension on the peninsula,” said Song Seong Yeob, a fund manager at KB Asset Management Co. in Seoul, which oversees the equivalent of $17 billion in assets.

Northern Factories

Stock-market declines were paced by companies that have factories in an industrial complex in the North’s Gaeseong city. Shinwon Corp., a South Korean apparel maker, dropped 2.8 percent to 1,395 won. Romanson Co., a watch maker, fell 2 percent to 1,950 won.

South Korea’s bulk carriers retreated after the Baltic Dry Index, a measure of raw materials-shipping costs, slid below 2,000 points for the first time since August. STX Pan Ocean Co., South Korea’s biggest bulk carrier, fell 2.6 percent to 11,400 won. Korea Line Corp., the second largest, lost 2.8 percent to 25,700 won.

Declines were capped by gains in defense-related shares. Victek Co., which makes electronic-warfare equipment, jumped as much as 12 percent before closing up 1.9 percent at 3,010 won. Speco Co., a military installation parts developer, gained 12 percent, while Huneed Technologies, a military communication equipment manufacturer, climbed 8 percent to 3,940 won.

To contact the reporters on this story: Andrea Wong in Taipei at awong268@bloomberg.net Saeromi Shin in Seoul at sshin15@bloomberg.net.

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net Darren Boey at dboey@bloomberg.net

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