By Kang Seung-woo
When it comes to the globalization of Korea’s financial industry, there has only been talk but little action. The nation’s globalization drive has been stalled in the face of the worldwide financial crisis triggered by the collapse of the U.S. investment banks (IBs).
Many argue that it is time to step back and watch how the situation will unfold down the road as it is too risky to foster home-grown IBs to go abroad in times of a global debt crisis. However, the nation’s top financial regulator believes that it is high time for the Asia’s fourth-largest economy to speed up globalization efforts.
“The financial business is backed up by the real economy and the Korean economy’s dependence on international trade is more than 90 percent, which translates to the real economy not being sustainable without the financial industry,” Financial Services Commission (FSC) Chairman Kim Seok-dong said in an interview with Business Focus.
“For the financial industry to support the economy, it needs to evolve to another level.”
As part of globalization in the sector, the 58-year-old Kim has set his eyes on introducing a globally-competitive, home-grown IB and the nation’s first local hedge fund.
In July, the FSC said that Korea will seek to permit the establishment of large home-grown IBs within this year, which will engage in financing mergers and acquisitions and trading in unlisted stocks.
Its revised version of the amended capital market law, contingent upon approval by lawmakers, enables brokerages with equity capital of over 3 trillion won ($2.51 billion) to reclassify themselves as IBs and compete with commercial lenders in corporate financing.
“There are two aspects on why I have interest in the domestic financial industry becoming globalized. One is the nation’s industrial structure, which manufactures a product here and exports it overseas, has nearly reached its limit. Now, we have to compete with advanced economies for major business projects overseas with the likes of nuclear power plant exports and ocean drilling project, which require financing. Currently, global IBs deal with financing for Korea’s projects, but I wonder how long we can rely on them,” Kim said.
“As the nation’s industry will move in the direction in the future, it is necessary for local IBs to emerge.”
He also said: “The other reason is our financial industry has gotten a wealth of knowhow and there are growing demands from Southeast Asia, Mongolia and Central Asia for systems for stock transactions, deposit insurance and bad-loan liquidation. In this regard, the local financial industry has a bright future.”
As for hedge funds, Kim has ordered an amendment to the enforcement decree of the capital market law in order to speed up the introduction of “Korean-style” hedge funds. The revision was approved by the Cabinet last month paving the way for their creation.
A hedge fund is privately-pooled money used by investors to generate high investment returns through risky bets using a wide range of investment strategies, including short selling and leveraged buyouts.
“Hedge funds play the role of reducing volatility by ensuring stability at the bottom of the market. This year, I’m sure that the first home-grown hedge fund will make its debut,” he said.
When the financial regulator unveiled its globalization plans, it faced a strong backlash. However, Kim expressed his will to push ahead with his plan.
“When I tried to introduce private equity funds (PEFs) to the local financial market in 2003, I met with a lot of opposition from the government, National Assembly and civic groups,” he said.
“Despite considerable concern over PEFs in their introductory phase, however, the PEF market has grown to the current level worth 30 trillion won,” he added. “People consider me as a mastermind of bureaucratic control. But I’m a market creator, not a regulator.”
Recently, local PEFs flexed their global muscle, succeeding in taking over the world’s top golf ball brand Titleist.”
In May, Mirae Asset PEF and Fila Korea, a sporting goods maker, won a bidding contest against Blackstone, a leading asset management firm, and Adidas to purchase Acushnet, the company that owns the Titleist brand, for $1.23 billion.
“I have faith in the local financial market and believe that local players will do a good job,” the chairman said.
Kim admits that his globalization push will not bear fruit shortly, but like the PEF case, it is a must-do for the future of the country.
“Witnessing Korean-born global IBs will take some time, but we have to get the job started right now, and we will be able to see them flourish in the future,” he said.
“Korea is expected to be more comfortable in dealing with the current financial turmoil than during the global financial fiasco in 2008 because the nation is well prepared for any woes and is one of a few countries in the world to observe macroeconomic policies.
“During the financial impasse, we are required to find new growth engines to help us to improve the financial sector such as hedge funds, IBs and alternative trading system (ATS) when the crisis ends. “We have to do it from now on.”
In its drive for globalization of the domestic financial industry, there are multiple programs to foster financial experts.
Since 2006, the FSC, along with the Korea Advanced Institute of Science and Technology (KAIST), has produced 270 graduates with an MBA degree in finance, while the financial investment industry has offered its own Global Capital Market Academy program since 2008.
Over the past 50 years, Korea’s gross domestic product (GDP) has grown five times more than that of the world, the lone occasion since Mercantilism in the 15th century and Kim says the DNA of the horse-riding people who ruled the Eurasian Continent for the feat.
“As the DNA of Koreans was inherited from their culture, it fits the market economy and financial industry,” he said.
And Kim believes that the DNA will contribute to Korea becoming the world’s seventh-largest economy in 2032.
“On the back of its solid economic growth and the strengthening won, Korea’s GDP will increase quickly,” he said.
“The period may be shorter because of the current financial turmoil troubling European countries including Spain, Italy and France.”