Korea gives up on total capital liberalization

By Kim Jae-won

Staff reporter

A high-ranking finance ministry official said Monday that the government has all but scrapped its plan to fully liberalize the capital market that was put on hold due to the global financial crisis which swept the world in 2008.

"We gave up the original plan of capital liberalization as the global financial crisis hit the nation in 2008. We are gearing up to make a new plan, but a new deadline has not been decided on yet," Kim Ik-joo, general director of international finance bureau at Ministry of Strategy and Finance told The Korea Times.

The government originally planned to liberalize the foreign exchange market totally by 2009, virtually removing all regulatory controls on the FX market and allowing international settlements in the Korean currency. But the plan was put on the backburner after the financial crisis, and is now apparently making Korean officials have second thoughts about the benefit of a fully open market, especially reflecting the global trend that some regulation is inevitable in order to secure stability.

"We are not saying that our plan has been ditched. We have suspended it temporarily," he said.

Kim said that regulations on currency forward are inevitable to protect the local foreign exchange market from possible financial crises.

"Our goal is to expand our financial markets. However, if we do not have some regulation, we may vulnerable to outside factors."

Kim's remarks more or less reflected the ministry's more cautious approach toward market enlargement - it recently announced a set of restrictions on foreign currency forward derivatives for both domestic and foreign banks.

A currency forward is a contract that locks in the price at which one can buy or sell a currency on a designated future date.

He objected to the argument that the government should allow the Korean won to be traded internationally, saying it was too early to discuss such an issue.

"What if there were large sales of our currency in a time of crisis?" he asked, adding that it was a risk the government can't afford to take at the moment.

During an announcement about the new regulatory measures, Vice Finance Minister Yim Jong-yong defended the new regulations, saying that they were intended to enhance overall market soundness.

"They are aimed at enhancing the soundness of the market, not to regulate or control it," Yim told reporters in a press conference. "We are taking this action to ease volatility. There are no problems with the economy that warrant the measures."