Anti-Foreign Sentiment Scares Away International Investors
By Lee Hyo-sik
The government unveiled a series of ambitious measures to turn the country into an international financial center over the past few years but the hub dream has become a hollow slogan, many international analysts say.
On Wednesday, the government announced the latest steps in its bid to achieve the financial hub plan, including providing tax breaks to promote mergers and acquisitions (M&As) between financial companies.
Among the measures are allowing the establishment of hedge funds and scrapping all regulations governing private equity funds (PEFs) by 2012. The government also said it will overhaul supervisory rules on the financial market to be on a par with those of advanced countries.
It plans to make things easier for financial firms to seek expansion through M&As and become internationally competitive investment banks with the Capital Market Consolidation Act, which is scheduled to take effect in 2009.
But many analysts say the government should do more than it has pledged, and should implement what it has promised, if it is serious about turning the world's 12th largest economy into a regional financial powerhouse.
Seoul Financial Forum Chairman Kim Ki-hwan said the government should continue its drive to deregulate the financial market, adding that the momentum has weakened over the past two years.
Kim pointed out that policymakers always pledge to ease regulations to make it more business-friendly. ``But they have just made some changes in specific sectors with the big picture left untouched. Policymakers are reluctant to take the initiative in reform for fear of taking responsibility for a possible failure in the future, which is the key reason behind the delay in the plan.''
Frederic Neumann, chief Korea economist at HSBC, said the capital market integration is only a first step towards the development of Seoul as a financial hub.
``The country faces a number of challenges, which make it unlikely for Seoul to rival other financial centers, such as Hong Kong or Singapore, any time soon,'' he said.
Neumann also said further regulatory reform appears necessary in order to attract significant investment in the sector. ``Also, Seoul still grapples with the image that foreign and domestic financial institutions do not always operate on the same footing. The development of a financial hub is likely to take time as financial market participants become more comfortable with Korea's regulatory system.''
Kim said the Korean public should have an unbiased and balanced view on the role of foreign capital and businesses to achieve the financial hub goal.
He noted that the best negative example is regulators' probe of the legitimacy of Lone Star's takeover of the Korea Exchange Bank (KEB) in 2003. ``Through this incident, the international community thinks Koreans believe that non-Koreans making money in Korea is like committing a crime, which drives away potential foreign investors.''
Also, Henry M. Seggerman, president of International Investment Advisers, said foreign financial institutions are doing business to make profits, adding that Lone Star did a huge favor for the Korean people by bailing out the KEB.
``As long as the Lone Star investigation, attempted extradition and prosecution continue, Korea's financial hub initiative is impossible,'' he said.
HSBC's Neumann said there are other qualitative hurdles that represent challenges for the development of a more international financial system.
``Foremost is the supply of a larger pool of skilled professionals, fluent in English, that can help Korea win business from other financial centers. Also, comparatively high tax rates may be one of the barriers that could be addressed by authorities, as they represent
one of the disincentives for the immigration of expatriates,'' he said.
Kim commented that to attract foreign investors and their families, Korea should construct more international schools so that children of foreign investors and company executives can study here and receive a quality education.
He noted that the country needs to build more hospitals where foreigners can communicate in English and receive high quality medical services.