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Summary
Socialist rhetoric could get in the way of South Korea’s artificial intelligence (AI) windfall. A senior advisor in Seoul spooked investors by hinting of redistribution of profits, echoing China’s call for ‘common prosperity.’ Like Beijing, he’s had to back down.
South Korea has the world’s best-performing stock market this year. It has now been thrust to the forefront of a global discussion over whether artificial intelligence (AI) widens wealth inequality—and how governments can ensure that society at large benefits from this revolutionary technology.
In a Facebook post on Monday, Kim Yong-beom, a veteran economist and chief of policy for President Lee Jae Myung, floated the idea of a “people’s dividend.” “In the AI era, excessive profits are naturally concentrated,” he wrote. His goal is to encourage the idea that profits made by the few winners are shared with those who lack AI-related skills or access to capital.
This is reminiscent of President Xi Jinping’s “common prosperity” drive in 2021, a socialist push to broaden China’s middle class. Dividing up the AI corporate windfall aside, Seoul has also focused on Korea’s elevated apartment prices. It has followed Xi’s line of “housing is to be lived in, not speculated on,” reinstating a heavy capital gains tax on multiple-home owners.
While this may be political posturing ahead of local elections in June, investors are not taking any risks. The benchmark Kospi index tumbled as much as 5.1% on Tuesday after Kim’s post, before paring losses. The influential policy advisor has since clarified that he would like to see tapped “excess tax revenue” generated from the AI boom, rather than the rollout of a new windfall levy on corporate profits.
In the eye of the storm are the two semiconductor giants, Samsung and Hynix, which sell memory chips to AI data centres. As we move to the agentic world, allowing the likes of OpenClaw to book travel and reply to e-mails, these models need a lot of memory chips to recall our preferences and past transactions. As a result, the two chipmakers are generating the kind of profits that Korea Inc has never seen before.
Samsung and Hynix are expected to be among the world’s five most profitable companies this year, earning as much as Alphabet and Microsoft. Considering free cash flow, they are doing even better, because the US hyperscalers have to spend big on infrastructure—including buying memory chips. In April, Korea’s chip exports jumped 174% year-on-year and total exports to the US rose by 54%.
While the government’s intentions are good, isn’t it a bit early to talk about sharing the corporate windfall? The president has been making a concerted effort to narrow the notorious Korea discount, and offered capital-gains-tax exemptions to retail investors that sell their overseas holdings and invest domestically.
At around 7,850, the benchmark index has gone well above Lee’s “Kospi 5,000” slogan. But Korea’s stock market is by no means out of the woods yet. Samsung and Hynix are only the world’s 11th and 15th largest companies by market value, respectively, despite their outsized profit outlook and the pervasive narrative of a semiconductor supercycle.
The Kospi is valued at 8.3 times 12-month forward earnings, below its 10-year historical average. In other words, the index’s sharp rise this year is due entirely to upward earnings revisions, not an expansion of valuation multiples.
Politicians injecting a socialist tone is not conducive to fostering a healthy stock market, which after all is a celebration of corporate profits and capitalism. China learnt this the hard way, having witnessed a years-long bear run shortly after Xi’s common prosperity push. Beijing has practically abandoned this slogan.
Korea’s stock market is at an interesting inflection point. This month, Interactive Brokers said it would give US retail investors direct access to the nation’s equities, making it the first major US-based broker to offer such a service. The government would do well to take a market-friendly tone.
There’s also the argument that profits won’t just stay with the two chipmakers’ shareholders. There will be economic trickle-downs. For instance, Samsung and Hynix can’t make their chips without tools. As AI craves more memory capacity and factory expansion, equipment vendors such as Wonik IPS and Eugene Technology can expect bigger orders, as can chemicals makers like Hansol. These smaller, under-the-radar firms are likely the ones that the government is keen to foster.
Or how about those working along the AI supply chain? Hynix has agreed to allocate 10% of annual operating profit to a performance bonus pool, resulting in an average payout of about 1.5 times annual salary last year. Samsung has been haggling with its labour union over compensation. But one thing is clear, companies need to cough up to retain engineering talent.
The Lee administration should be patient and let Korean chipmakers flourish. Socialist rhetoric can only be a road to common poverty. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian markets.
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