By Cho Jin-seo
Out is the currency war, in is the capital control competition.
The government may introduce capital control measures in line with rules to be adopted in Europe, a government official said Thursday.
Like many emerging nations, Korea has been weighing various options for capital control, fearing that increasing volatility in the global financial market can have a spillover effect on Korea.
An official at the Ministry of Strategy and Finance said that Korea may follow in the footsteps of countries in Europe.
“We have many options, but Korea’s capital control rules have to be in line with global trends,” he told reporters. “What is happening in Europe is very interesting for us.”
He did not say exactly what rules the ministry was watching.
In the United Kingdom, a bank tax of up to 0.07 percent is to be levied from next year upon banks’ liabilities, which is expected to raise 2.5 billion pounds a year.
A number of government officials have admitted that Korea has been preparing new capital control rules.
Yoon Jeung-hyun, the finance minister, said in a TV interview that there was a need for Korea to set up safeguards on speculative capital.
“There is a risk of a systemic problem in the financial system,” he said. “Capital must flow into productive use, such as corporate investment. We are closely monitoring (capital flows).”
On Monday, Yoon told reporters that there were a number of options, though he has not decided on what to use and when.
Capital controls refer to measures to regulate the flow of money in and out of the country. They can be a direct taxation on financial transactions, or indirect control using a cap system on banks’ liabilities and other balance sheet items.
In the past, capital controls were demonized by mainstream Western economic theories, which stated that they were against free market principles and hampered free flow of capital across the border.
The financial crisis has changed this perception. Even the International Monetary Fund, which was in the vanguard of free-market capitalism, has cautiously changed its position on the issue.
Earlier this month, managing director Dominique Strauss-Kahn said he “understands” the need for capital controls in emerging nations, as the excessive flow of dollars from the United States could create asset price bubbles in smaller nations.
Korea senses the change. Minister Yoon said that the IMF has become relaxed on capital controls, as long as a country does not try to intervene in the foreign exchange market instead.
Even the Financial Times ran a column Wednesday under the title of “The world should welcome capital controls,” written by Ilene Grabel and Chang Ha-joon, who are researchers based in the United Kingdom.
Rumors abound that Korea will reintroduce the 14-percent withholding tax on foreign bond holders’ earnings, which was abolished during the financial crisis in order to encourage capital inflow.
But others think that more indirect rules, such as the bank levy, are more likely to happen. Shin Hyun-song, an advisor to President Lee Myung-bak, has been calling for a bank levy on non-deposit liabilities of banks, which will discourage banks from having too much dollar-denominated debt.
What the Korean government is worried about is the market response. A high-ranking official said last week that the government does not want to introduce new capital control rules before or right after the G20 Seoul Summit on Nov. 11 and 12, because it could tarnish Korea’s image as a promoter of the market economy.
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