Corporate Performance Fuels 30 Trillion Won Surge in South Korea's Money Supply

South Korea's broad money supply, known as M2, saw a significant expansion in May, growing by 32.2 trillion won (0.8%) to reach 4,184.4 trillion won. This marks the largest monthly increase since August of the previous year and the fourth-largest on record. This follows a substantial 25.3 trillion won rise in April, indicating a sustained trend of increasing liquidity in the economy.

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The increase in M2 was mainly influenced by a 24.3 trillion won increase in demand deposits compared to the previous month.

The primary driver behind May's surge was a 24.3 trillion won increase in demand deposits, which include corporate short-term working capital and expanded fund management by financial institutions. Deposits from semiconductor companies, bolstered by strong export performance and improved corporate earnings, also contributed significantly, particularly through a 3.8 trillion won rise in trusts with maturities of less than two years.

Analysis of M2 by sector reveals that non-financial corporations, including private and public enterprises, saw the most substantial increase, adding 30.1 trillion won. Other financial institutions and the public sector also contributed positively. However, households and non-profit organizations experienced a decrease of 19 trillion won in their M2 holdings, which analysts attribute to funds being redirected towards stock investments, as evidenced by a 11.7% year-on-year increase in money market funds and beneficial certificates.

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The increase in demand deposits resulted from corporate short-term working capital and expanded fund management related to securities and derivatives markets by some other financial institutions.

The growth in M2 underscores the positive impact of robust exports and improved corporate profitability, especially within the semiconductor industry, on the broader economy. The Bank of Korea's data also indicated a 10.0% year-on-year increase in the narrower measure of money supply, M1, further signaling ample liquidity. Overall financial institution liquidity (Lf) and broad liquidity (L) also saw increases, reflecting a generally liquid financial environment.

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The inflow of deposits from semiconductor companies, driven by strong exports and improved corporate performance, was a major factor in the increase of trusts with maturities of less than two years.