The Bank of Korea released data on Thursday showing that foreign investors’ financial holdings in South Korea surpassed the $3 trillion mark for the first time, propelled by a nearly 70% surge in the South Korean stock market during the second quarter. The quarterly increase was the largest since the statistical series began in 1994. However, the same data also revealed the flip side of the coin: South Korea’s net external financial assets posted their steepest quarterly decline on record due to the soaring valuation of foreign-held Korean equities, falling to their lowest level since the third quarter of 2014.
According to the Bank of Korea’s preliminary estimates, foreign investors’ financial investment stock in South Korea reached $3.02 trillion as of the end of June, surging by $891.2 billion (approximately NT$28.4 trillion) from three months earlier. This marks the first time the indicator has crossed the $3 trillion threshold since its inception in 1994, with the quarter-over-quarter increase also setting a new all-time high.
Of this total, non-resident securities investment balances jumped by $859.3 billion to $2.33 trillion, while direct investment inched up by just $400 million to $321.1 billion. The Bank of Korea noted in its statement: “The sharp rise in domestic share prices in South Korea pushed up the valuation of Korean stocks held by foreign investors.”
South Korea’s benchmark KOSPI index soared from 5,052.5 points to 8,476.5 points during the second quarter, a gain of 67.8%, far outpacing major markets such as the United States over the same period. Breaking down the change into transaction and non-transaction factors reveals that the shift in foreign holdings was not primarily driven by actual buying. Data shows that foreign investors’ holdings actually decreased by $47.5 billion due to actual transactions in the second quarter, while non-transaction factors—namely price changes in stocks and exchange rates—added a staggering $906.7 billion. This means the explosive growth in the market value of foreign-held Korean equities was overwhelmingly attributable to paper gains on existing positions rather than an influx of new capital.
On the external assets side, South Korean residents’ overseas investment stock rose by $201.7 billion to a record $3.08 trillion as of end-June, with the quarterly increase also the highest in history. Driven by the strength of U.S. equities, South Korean residents’ securities investment increased by $142.7 billion from three months earlier to $1.38 trillion, while direct investment rose by $20.8 billion to $872.5 billion. The Bank of Korea added that the Dow Jones Industrial Average climbed 12.9% in the second quarter, while the tech-heavy Nasdaq Composite surged 21.4%.
Yet it was the very same force—the explosive growth in the valuation of foreign-held Korean equities—that caused South Korea’s net external financial assets to contract sharply. As of end-June, South Korea’s net external financial assets fell to $64 billion, down $689.5 billion from $753.6 billion three months earlier—a decline of 91.5%. Both in absolute terms and percentage terms, this represented the largest quarterly drop since the statistical series began in 1994. Compared with the same period a year earlier, the indicator fell by $89.5 billion, reaching its lowest level since the third quarter of 2014.
Net external financial assets represent the financial assets held by South Korean residents abroad, minus the financial assets held by foreigners within South Korea. Bank of Korea officials explained that the sharp decline was not primarily caused by capital outflows from South Korea, but rather by the fact that the KOSPI’s gains far exceeded those of major markets such as the United States, causing the valuation of Korean stocks held by foreigners to swell dramatically and thereby inflating South Korea’s external financial liabilities.
The Bank of Korea stressed that while net external financial assets shrank significantly, the actual scale of overseas assets held by South Korean residents did not decrease—in fact, it surpassed $3 trillion for the first time at the end of the second quarter. “The existing assessment that external shocks can be buffered by selling overseas assets to stabilize foreign exchange supply and demand remains valid,” a central bank official said.
However, analysts also pointed out that the relatively high proportion of foreign ownership in the South Korean stock market means that whenever share prices fluctuate sharply, the net external financial assets indicator will also swing dramatically, adding complexity to its interpretation.
In addition, South Korea’s net external claims stood at $367.8 billion as of end-June, up $2.3 billion from the previous quarter, marking the first rebound in three quarters. The Bank of Korea attributed this to robust exports, which led companies to hold export proceeds in the form of deposits rather than immediately converting or deploying them, combined with domestic banks redepositing these funds overseas—both factors jointly boosting net external claims.
Market participants noted that the changes in South Korea’s second-quarter international investment position were essentially a balance-sheet revaluation driven by equity market valuations. Foreign investors did not aggressively increase their exposure to Korean assets, nor did South Korean residents sell off overseas positions. Yet the KOSPI’s exceptionally strong performance made South Korea appear, on paper, to “owe foreigners more.” This price-effect-driven shift has limited impact on South Korea’s actual external payment capacity, but it serves as a reminder to investors: when interpreting country-level balance-sheet data, valuation effects must be distinguished from actual capital flows.