(Bloomberg) -- South Korean stocks rose after the main opposition party agreed to back the government’s decision to drop a plan that would have imposed a capital gains tax on retail investors.
The Democratic Party, which controls the National Assembly, dropped its months-long opposition to the controversial move saying it cannot ignore the plight of retail investors.
“The current Korean stock market is in a too difficult situation, and we cannot ignore the position of the 15 million stock investors who are investing and relying on it,” the main opposition leader Lee Jae-myung said on Monday, calling the move “regrettable.”
By Monday afternoon, South Korea’s stock benchmark gauge Kospi gained as much as 1.7%, the most since September 26, while the small-cap Kosdaq Index rose as much as 3.5%. Still, the Kospi is down 2.9% so far this year, which makes it one of the worst performers globally among the major equity markets in the world.
The debate surrounding the capital gains tax strikes at the heart of a drive by South Korean authorities to galvanize the domestic stock market, and draw investors to take equity market risk.
The Democratic Party had argued that the government’s decision not to impose the levy on retail investors would favor the rich and weaken the government’s coffers. Korea’s influential retail investors, who account for about two-thirds of daily stock market turnover, had backed the government’s decision arguing the capital gains levy would weigh on investor sentiment.
“Today’s rebound is partially attributed to the previous rebound from US on Friday,” said Jung In Yun, chief executive at Fibonacci Asset Management Global Pte. “However, the change in the course of policy direction from the opposition party is a positive sign indeed.”
The planned capital gains tax had prompted more Koreans to invest in US equities, rather than local stocks, according to Yun.
After a two-year delay, South Korea had initially planned to introduce a capital gains tax of at least 20% on retail investors starting in 2025 if their annual capital gains from stock investments exceeded 50 million won ($36,491). Those who earned more than 2.5 million won from other financial assets would have also paid the levy under the proposal.
But the government dropped that proposal earlier this year in a bid to attract investors to equity markets. South Korea currently levies at least 20% capital gains tax for major shareholders who hold at least 5 billion won of stocks.
Separately, on Monday, Prime Minister Han Duck-soo delivered the government’s 2025 budget speech in parliament on behalf of President Yoon Suk Yeol. This is the first time in 11 years a president hasn’t presented the budget personally, and comes as Yoon’s approval rating has plummeted to a record low.
--With assistance from Soo-Hyang Choi, Winnie Hsu and Balazs Penz.
(Adds comments in paragraph 7,8, updates index levels; president Yoon becoming first president in 11 years not to present budget speech in parliament. An earlier version of this story was corrected to make clear that the decision to drop the tax was only for retail investors)
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