KRX losing chance for structural reform

By Yoon Ja-young

As bills aiming at structural reform of Korea Exchange (KRX) remain pending at the National Assembly, concern is increasing that it will lose the chance for change and fall behind its global competitors.

The country’s capital market had been growing until the late 2000s, thanks to economic growth and an increasing number of stock investors. After 2010, however, it faced structural limitations ― growth has been slowing due to the sluggish economy and aging of the population. The total market cap has been growing a mere 2 percent annually, and the value of monthly transactions fell to 122 trillion won last year from 188 trillion won in 2011.

Increasing investment in overseas stocks by institutional and small investors is also a concern for the KRX which gets a commission for trading on the Seoul bourse. Koreans’ investments overseas more than tripled to nearly $8 billion in 2014 from $2.5 billion in 2011, and the value of transactions of overseas index derivatives snowballed to $22.8 billion during the same period.

Foreigners’ investment in Korean index derivatives, meanwhile, halved to $419.3 billion in 2014 from $841 billion in 2011.

Korea’s financial market is thus being poorly evaluated in terms of competitiveness. Korea ranked 87th in financial market development in the Global Competitiveness Report published by the World Economic Forum. It ranked 47th in “financing through the local equity market” and 78th in “regulation of securities exchanges,” the poorest among major Asian economies.

The inefficient capital market is hampering growth of start-ups as well. Korea ranked 86th in terms of “venture capital availability” in the report, far below Singapore at third, Taiwan at 12th, China at 16th and Indonesia at 17th. Analysts say that as the KRX has been monopolizing the operation of both the main bourse and the tech-loaded Kosdaq, it lacked motivation for innovation and took less care in funding for start-ups.

Structural reform of the bourse operator has been regarded as the first step in recovering competitiveness in the capital market, but it has seen no action for the past few years. Major stock market operators overseas have completed structural reform. Most of them became shareholding companies and completed initial public offerings (IPO), which enabled them to aggressively seek new opportunities through global M&As and new businesses.

“Japan completed an IPO after merging the stock exchanges in Tokyo and Osaka into a shareholding company. Now, it is making efforts to get leadership in the Asian market, cooperating with bourse operators in Singapore and Taiwan,” an official at the KRX explained. He added that Hong Kong’s bourse operator is also strengthening M&A efforts after transforming into a shareholding company and listing itself on the bourse. “The KRX is 10 years behind other major bourse operators in structural reform.”

Among the Organization for Economic Cooperation and Development (OECD) member countries, Korea and Slovakia are the only ones whose bourse operators haven’t transformed into shareholding companies and haven’t completed IPOs.

The Capital Market Act should be revised to enable structural reform of the KRX, but the related bills are stagnating at the National Assembly despite a consensus reached by the governing and opposition parties regarding them.