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Risks Behind the Semiconductor Surge
SEOUL — Former Bank of Korea Gov. Rhee Chang-yong warned that South Korea’s semiconductor boom could deepen divisions within the economy and leave the country vulnerable to shifts in U.S.-China relations.
Appearing Oct. 10 on the YouTube channel Shuka World, Rhee said South Korea’s first-half growth reached its highest level in decades by some measures. But he cautioned that a semiconductor “supercycle” would not resolve all of the country’s economic challenges.
Even if strong chip demand lasts a decade, Rhee said, concentrating growth in one industry could widen disparities between the semiconductor sector and the rest of the economy. He also argued that South Korean companies have benefited not only from their competitiveness but from U.S.-China tensions that have restricted China’s access to advanced equipment.
That advantage could fade quickly if relations between Washington and Beijing improve or Chinese companies develop critical equipment domestically, he said. Policymakers therefore should not assume chipmakers can indefinitely maintain operating profit margins above 70%.
Warning Against Aggressive Spending
Rhee also criticized the government’s expansionary fiscal stance. A temporary increase in tax revenue, he said, should not be used to justify budget increases of more than 10% for investments that could continue for a decade or longer.
With growth expected to exceed South Korea’s potential growth rate this year and next, Rhee argued there was little reason to use government spending to push it still higher. He called instead for a more conservative approach that smooths growth over time.
Defense of Interest-Rate Decisions
Rhee rejected criticism that the central bank raised rates too slowly during his tenure, contributing to higher home prices and a weaker won. He said the Bank of Korea increased its benchmark rate by 2 percentage points during his first eight months in office.
Later, inflation stabilized in the 2% range while economic growth remained below its potential rate, leaving no theoretical basis for further increases, he said.
Rhee, an economist who previously served as a Seoul National University professor, vice chairman of South Korea’s Financial Services Commission and director of the International Monetary Fund’s Asia and Pacific Department, led the Bank of Korea from April 2022 until April 20, 2026. He is now a special professor of economics at Seoul National University.
U.S. Dollar Volatility and Global Investors
Addressing sharp swings in the won-dollar exchange rate, Rhee pointed to South Korea’s large current-account surplus and portfolio rebalancing by overseas investors. He said rising semiconductor shares pushed some foreign investors beyond their desired exposure to South Korean assets, prompting them to take profits. That selling drove the exchange rate higher in the short term before the current-account surplus was more fully reflected and the won began strengthening again.
Rhee said South Koreans should reconsider how they view currency fluctuations. Unlike during the Asian financial crisis, South Korea is now a net creditor nation, he said, and a floating exchange rate should be accepted as a shock absorber against external pressures.
Raising interest rates or deploying foreign-exchange reserves merely because the won has weakened could help foreign investors realize profits without addressing a genuine risk of national insolvency, he argued. Exchange rates, like stock prices, should be treated as fluctuating financial-asset prices and generally left to the market, he said.
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