Opinion: South Korea's Chip Boom Won't Mirror 1997 Crisis

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South Korea’s rapidly rising stock market, fueled primarily by memory chip stocks, has sparked concerns about a potential repeat of the 1997 Asian financial crisis. However, the current economic landscape is substantially different from that time, making such a crisis less likely.

Recently, South Korea’s semiconductor leader completed a secondary listing on a major U.S. exchange, raising $26.5 billion — the second-largest share offering globally by a non-U.S. company and a record in its own right. Meanwhile, a prominent electronics manufacturer has seen its stock rise over four times, and the overall stock market has doubled over the past year.

In the 1990s, South Korea liberalized its capital account, which led to massive inflows of short-term foreign investment. Large conglomerates expanded rapidly by relying heavily on short-term dollar-denominated debt, resulting in substantial trade deficits and external liabilities. When the Asian financial crisis hit, foreign investors pulled out en masse, the won plummeted, foreign exchange reserves shrank sharply, and many companies defaulted on their debts. The country was compelled to seek a nearly $58.3 billion bailout from the International Monetary Fund and implement harsh austerity measures, plunging the economy into turmoil.

Today, South Korea is a leader in the artificial intelligence industry. Its trade balance remains robust, external debt levels are relatively low, and foreign exchange reserves are about 14 times higher than in 1997. The country also maintains some capital controls, adding a layer of financial stability.

However, the biggest risks today stem from domestic debt and risk mismatches. Many retail investors are borrowing money from banks under various pretenses to invest in stocks, often taking on leverages far beyond what their incomes can sustain. A reversal in stock or credit markets could trigger widespread panic selling.

Memory semiconductor shortages are expected to persist for now. Yet, the industry’s cyclical nature suggests overcapacity may develop within a few years. Currently, the primary dangers involve excessive speculation and the potential cascade effects if market sentiment turns sour.