HONG KONG: At one level South Korea represents a triumph of globalization over economic nationalism. Yet because of the head-in-the-sand policies of the Seoul government this could well turn sour.

Foreigners now own most of the commercial crown jewels of South Korea, the newest and seemingly most nationalist member of the developed world. Whether it is the world's leading chip maker and mobile phone challenger, Samsung Electronics, or the world's largest and most profitable steel producer, Pohang Iron Steel, or Korea's major financial groups Kookmin and Shinhan, most of Korea's high-profile companies are now more than 50 percent owned by foreigners. In some cases the foreign stakes go above 70 percent. Foreigners now account for 44 percent of the total Korea stock market capitalization of around $360 billion.

The statistics are especially remarkable given that less than a decade ago foreign ownership of equity in Korean companies was highly restricted. Even when the nation joined the OECD in 1996, liberalization was at snail's pace. It took the Asian financial crisis and strong-arm IMF and creditor tactics to force Koreans to accept almost unrestricted foreign ownership.

Koreans still often express resentment at how the sudden withdrawal of foreign bank lending in 1997-98 caused a collapse in the Korean currency and asset values. The crisis opened the way to equity capital liberalization and made it possible for foreigners to acquire large portions of Korean commerce and industry at very depressed prices.

Nor was this just a one-time process. The foreign buying of Korea has continued steadily, and with occasional big waves. Over the past year some $25 billion in new foreign portfolio equity has arrived.

So far there has been no major backlash. Koreans may be uncomfortable with the numbers, but they can take comfort from the fact that in most cases foreign ownership is fragmented and management control rests firmly with Koreans - frequently with the families of the former major shareholders. Still, resentment of foreigners, especially when they try to exercise their rights as shareholders, lurks not far below the surface.

Yet Koreans are failing to acknowledge that they themselves now bear the main responsibility for the foreign capital invasion. Instead of buying their own companies, they are investing in government bonds, houses and U.S. debt.

Despite foreign buying, Korean equities continue to be priced at a fraction of overseas equivalents. The Korean stock market is selling on nine times its historic earnings compared with 21 for the S&P 500, 14 for London, 15 for Taiwan, 16 for Hong Kong or 32 for Japan. The foreign owners are even collecting dividend yields of around 2.5 percent - as much as Koreans are earning on their massive holdings of short-term U.S. debt.

The fact is that individual Korean savers are put off equity investment by the volatility of the market, and by memories of 1997. In turn, volatility is a result of the lack of Korean institutional investment, which is a direct result of laws forcing the majority of Korea's vast household savings held in insurance and pension funds into bonds and fixed deposits. While foreigners buy their farm, Koreans are buying bonds.

The situation grows more ridiculous by the day. The government is in the process of issuing vast quantities of won-denominated bonds as a "war chest" in order to be able to sell won and buy dollars to prevent the exchange rate from appreciating. This obsession with maintaining an undervalued currency will result in further expansion of bloated foreign reserves. These are now $166 billion - far more than the foreigners have spent acquiring their 44 percent of Korean equities.

The Korean government's failure to let market forces determine the exchange rate is leading directly to the foreign acquisition of Korean assets by keeping them cheap in dollar terms and channeling Korean savings into U.S. consumer debt rather than into ownership of the true pride of Korea - Samsung, POSCO, etc.

Such dumb policies could spark both a nationalist backlash in Korea and a trade backlash by Korea's trading partners.