With the passage of the "foreign exchange stabilization act" in the National Assembly, moves to draw back to the domestic market those known as "Korean retail investors trading U.S. stocks," who have been investing in overseas equities, are gathering pace. As a result, the newly introduced return-to-domestic-market account (RIA) is increasing rapidly, nearing 60,000.
According to 10 major domestic securities firms (based on equity capital) on the 1st, the number of RIA accounts stood at about 57,000 as of the previous day. It has been only eight days since the product launch on the 23rd of last month, and the number has steadily risen after about 9,000 were opened on the first day. Some securities firms have already opened more than 10,000 accounts.
An RIA allows investors to sell overseas stocks, reinvest the proceeds in won or domestic stocks, and, if they maintain the investment for more than a year, receive a partial reduction of capital gains tax on overseas stocks. It applies up to a maximum of 50 million won per person, with the deduction rate varying by the time of sale. A 100% tax reduction is available through May 31, 80% through July 31, and 50% through the end of the year.
While account openings are rising quickly, the actual size of inflows remains limited. Funds that have flowed in through RIAs so far amount to about 330 billion won (excluding KB and Hana Securities), just 0.15% compared with the total stock holdings in the U.S. market by Korean retail investors trading U.S. stocks (about 223 trillion won).
The sluggish movement of funds is attributed to the recent weakness in the U.S. stock market. Investors are delaying sales because they have not generated sufficient gains from their holdings. Heightened tensions in the Middle East have also increased volatility in the domestic market, creating an environment that appears to have made it harder to decide to return.
Indeed, the amount of overseas stocks held in custody, which reached 245 trillion won at the end of February this year, fell about 10% to around 223 trillion won as of the end of last month. Despite net purchases of 800 billion won during the same period, the overall holdings decreased, which is interpreted as the result of a market decline.