The Impact of Foreign Capital in the New Korean Economy
Korea Times:
Financial firms have carried out drastic and painful restructuring over the past few years and succeeded in cleaning up their balance sheets to emerge a lot stronger.
With the unprecedented restructuring designed to streamline their organizations and remove bad assets, the Korean financial industry now looks sounder and more productive than before. But not enough to effectively compete with their bigger foreign rivals.
The domestic financial industry is facing another shakeup _ a make-or-break battle with foreign capital.
As in the past, financial firms look to be standing always at the crossroads. In this fast-changing financial environment, any financial company that sits idle without adapting to change, will be weeded out.
Citigroup, Standard Chartered and other global financial heavyweights are increasing their dominance in the local market, replacing private equity funds, such as Newbridge Capital and Carlyle Group.
Newbridge, Carlyle and Lone Star funds entered this market to buy distressed financial firms and sell later for maximum gains.
But Citigroup and Standard Chartered are different from these foreign capital funds. They are taking over local banks to do business and prosper in the long run.
If local financial firms do not sharpen their edge, they will lose their clients to these foreign banks that are armed with stronger, sophisticated and more efficient banking and investment skills.
A growing presence of advanced foreign capital here will pose a major threat to local financial firms and at the same time provide an opportunity for them to look on longer-term growth as a ``a necessary evil.’’
They are necessary as they will help upgrade the domestic financial market, but on the other hand any excess capital flows into the country from abroad may end up undermining the country’s financial sovereignty, analysts said.
Some analysts say that if the government does not take appropriate steps to check the rising foreign influence, a growing number of financial firms will fall into the control of foreign investors.
They point out that foreign investors believe there is still attractive long-term value in Korea, and they are not too concerned with recent short-term volatility but rather convinced of the improvements and opportunities to be made.
``Foreign funds still see many opportunities in local financial markets, especially in smaller companies, including banks and insurance firms,’’ McKinsey & Company Asia chairman Dominic Barton said in an interview with The Korea Times.
``The financial system in Korea is very attractive over the long term because of the increased income growth,’’ he said. ``As you look at the demographics, there are going to be many more savers over time as the population ages, and there will be an asset management boom, which I think will also create opportunities in financial services.’’
Institute for International Economics (IIE) senior economist Monty Graham said that the government’s long-term plan to transform the nation into a financial hub in Northeast Asia will further encourage foreign investment by strategic investors.
``One reason for foreign investor interest in Korea is to partake in this hub development,’’ he said. ``Foreign financial firms view the development of this regional hub quite seriously.’’
Foreign Capital’s Growing Presence
Following the 1997 financial crisis, foreign private equity funds, such as Carlyle Group and Newbridge Capital, rushed to take over distressed financial companies for short-term capital gains.
Over the past few years, private equity funds have been replaced by foreign strategic investors, including Citigroup and SCB, with the government-led turnaround restructuring at a final stage.
The takeover of Korea First Bank (KFB) by Newbridge in 1999 triggered a series of active foreign investments in the local market. In 2003, Lone Star took over Korea Exchange Bank (KEB). In 2004, Citigroup bought KorAm Bank and Standard Chartered Bank (SCB) acquired KFB.
According to the Financial Supervisory Service (FSS), foreign-controlled banks accounted for 21.7 percent of the domestic banking market in terms of total assets, up from 15.5 percent in 2003 and 10.2 percent in 2000.
In particular, the ratio of foreign stakes in Korean commercial banks to the total came to nearly 50 percent last year, up from 27 percent in 2000 and 12.3 percent in 1998. By bank, the foreign stakes in Kookmin Bank, the nation’s largest lender, stands at 76.1 percent. Foreign holdings in Shinhan Financial Group and Hana Bank records 62.8 percent and 68.3 percent, respectively.
Foreign investors are also paying close attention to non-banking financial firms. Foreigners’ share of the life insurance industry increased from 8 percent in 2001 to 16.1 percent last year, while foreigners holding six major non-life insurers accounted for 42.63 percent in 2004, up from 32.64 percent a year ago.
Foreign players accounted for 19.4 percent of the brokerage industry in terms of sale on commission in 2004, up from 3.9 percent in 1997. Local shares held by foreigners took up 42.34 percent of the total market capitalization in February, compared with 30.08 percent in 2000 and 18.68 percent in 1998.
Foreigners have also strengthened their presence in the asset management market, with market share reaching 16.39 percent at the end of last year, more than doubling from a year ago.
Growing Opposition to Foreign Capital
With more Korean financial firms falling into the hands of foreigners, there has been growing opposition to foreign capital among Korean people. Many Koreans are concerned that the rise of foreign participation may hinder the coordination of stabilization efforts by the government and financial firms during times of financial turmoil and thus result in a loss of financial sovereignty
They stress that Korea should learn from Mexico, which faced loss of economic sovereignty. After the currency crisis in 1995, Mexico pursued sweeping restructuring and privatization in the banking sector. But through this process, most Mexican banks came under foreign capital control. Only one out of the six big commercial banks in Mexico is managed by domestic capital today.
Early this year, Kookmin Bank president Kang Chung-won expressed concern over the growing foreign presence here, saying, ``Korea has an abnormal financial market structure where profits made from performance by Koreans go into the pockets of foreigners.’’
Even the government has become more vigilant about attracting foreign capital after expensive lessons from a series of foreign investment cases, including the one involving Newbridge Capital.
The government has regretted the sale of the KFB to Newbridge, after concluding that the sale did not generate any positive effects for the local financial market. ``It is unfortunate that the sale of KFB to the U.S. fund did not generate any positive effects. The government will not make such a mistake again in future,’’ Former Finance-Economy Minister Lee Hun-jai said.
In this backdrop, the government has introduced a more rigid regulation system to enhance monitoring of the character and nature of foreign capital. As part of that plan, it decided to restrict the number of foreign directors at Korean banks to less than half of the total board members. It also enacted a law to promote the establishment of homegrown private equity firms.
In a separate move, the Bank of Korea has recently submitted a report to Chong Wa Dae demanding more stringent regulation against foreign speculative funds, such as hedge funds and private equity funds.
Regarding opposition to foreign capital, many experts warn that emotional opposition to foreign capital and excess restrictions will scare away good foreign capital, having a negative effect on the nation’s financial market and ongoing hub project.
``Opposition to foreign capital is dangerous and will cause trouble in the future,’’ Korea Institute of Finance economist Jung Han-yung said. ``The restrictions could have the effect of deterring good foreign investment in Korean financial firms.’’
Barclays Capital economist Dominique Dwor-Frecaut also said that resentment against foreign capital will deprive Korea of much needed foreign expertise and capital.
Financial Industry Still at Crossroads
Although the Korean financial industry has overcome the crisis today, it is yet to reach a level of advanced nations and still stands at a crossroads. Many turnarounds are not yet complete, and there are still too many unnecessary barriers to successful global integration.
Experts say that Korea should not create more restrictions to foreign investment because it needs the presence of both strong Korean financial firms and strong foreign firms in order to upgrade the financial market to international standards and realize its hub vision.
They also stress that the government should further liberalize the financial sector by removing regulation barriers between industries so that local financial firms can compete with foreign counterparts.
Former AMCHAM chairman Jeffrey Jones said that under the current regulatory system, banks, securities and insurance companies are only able to offer products and services that the government specifically permits.
``This puts Korean financial firms at a tremendous disadvantage. However, if a product or service is not prohibited, they are free to engage in any service or activity they wish,’’ he added. ``This gives them much greater flexibility in management and permits them to be much more creative in providing products and services to customers.’’
Graham at IIE said that it is important for Korea not to create major disincentives to foreign investment in the Korean financial sector.
``Korea should recognize that international financial centers, such as New York and London, are just that foreign-owned firms are as prevalent in these centers as are domestically-owned ones,’’ he added.
``So, there can be a major trade-off between Korea’s goal to emerge as a strong regional financial hub and the goal of some Koreans to keep the Korean financial sector largely under domestic control,’’ he added. ``If the second goal is pursued, the first is simply not likely to be achieved.’’
The experts stress that since there have been more cases for foreign capital to have a positive effect on the local market, Korea should make efforts to prevent a few bad examples, including the one involving Newbridge Capital, from deterring the continuation of a process that will, in net, produce a positive outcome.
Financial firms have carried out drastic and painful restructuring over the past few years and succeeded in cleaning up their balance sheets to emerge a lot stronger.
With the unprecedented restructuring designed to streamline their organizations and remove bad assets, the Korean financial industry now looks sounder and more productive than before. But not enough to effectively compete with their bigger foreign rivals.
The domestic financial industry is facing another shakeup _ a make-or-break battle with foreign capital.
As in the past, financial firms look to be standing always at the crossroads. In this fast-changing financial environment, any financial company that sits idle without adapting to change, will be weeded out.
Citigroup, Standard Chartered and other global financial heavyweights are increasing their dominance in the local market, replacing private equity funds, such as Newbridge Capital and Carlyle Group.
Newbridge, Carlyle and Lone Star funds entered this market to buy distressed financial firms and sell later for maximum gains.
But Citigroup and Standard Chartered are different from these foreign capital funds. They are taking over local banks to do business and prosper in the long run.
If local financial firms do not sharpen their edge, they will lose their clients to these foreign banks that are armed with stronger, sophisticated and more efficient banking and investment skills.
A growing presence of advanced foreign capital here will pose a major threat to local financial firms and at the same time provide an opportunity for them to look on longer-term growth as a ``a necessary evil.’’
They are necessary as they will help upgrade the domestic financial market, but on the other hand any excess capital flows into the country from abroad may end up undermining the country’s financial sovereignty, analysts said.
Some analysts say that if the government does not take appropriate steps to check the rising foreign influence, a growing number of financial firms will fall into the control of foreign investors.
They point out that foreign investors believe there is still attractive long-term value in Korea, and they are not too concerned with recent short-term volatility but rather convinced of the improvements and opportunities to be made.
``Foreign funds still see many opportunities in local financial markets, especially in smaller companies, including banks and insurance firms,’’ McKinsey & Company Asia chairman Dominic Barton said in an interview with The Korea Times.
``The financial system in Korea is very attractive over the long term because of the increased income growth,’’ he said. ``As you look at the demographics, there are going to be many more savers over time as the population ages, and there will be an asset management boom, which I think will also create opportunities in financial services.’’
Institute for International Economics (IIE) senior economist Monty Graham said that the government’s long-term plan to transform the nation into a financial hub in Northeast Asia will further encourage foreign investment by strategic investors.
``One reason for foreign investor interest in Korea is to partake in this hub development,’’ he said. ``Foreign financial firms view the development of this regional hub quite seriously.’’
Foreign Capital’s Growing Presence
Following the 1997 financial crisis, foreign private equity funds, such as Carlyle Group and Newbridge Capital, rushed to take over distressed financial companies for short-term capital gains.
Over the past few years, private equity funds have been replaced by foreign strategic investors, including Citigroup and SCB, with the government-led turnaround restructuring at a final stage.
The takeover of Korea First Bank (KFB) by Newbridge in 1999 triggered a series of active foreign investments in the local market. In 2003, Lone Star took over Korea Exchange Bank (KEB). In 2004, Citigroup bought KorAm Bank and Standard Chartered Bank (SCB) acquired KFB.
According to the Financial Supervisory Service (FSS), foreign-controlled banks accounted for 21.7 percent of the domestic banking market in terms of total assets, up from 15.5 percent in 2003 and 10.2 percent in 2000.
In particular, the ratio of foreign stakes in Korean commercial banks to the total came to nearly 50 percent last year, up from 27 percent in 2000 and 12.3 percent in 1998. By bank, the foreign stakes in Kookmin Bank, the nation’s largest lender, stands at 76.1 percent. Foreign holdings in Shinhan Financial Group and Hana Bank records 62.8 percent and 68.3 percent, respectively.
Foreign investors are also paying close attention to non-banking financial firms. Foreigners’ share of the life insurance industry increased from 8 percent in 2001 to 16.1 percent last year, while foreigners holding six major non-life insurers accounted for 42.63 percent in 2004, up from 32.64 percent a year ago.
Foreign players accounted for 19.4 percent of the brokerage industry in terms of sale on commission in 2004, up from 3.9 percent in 1997. Local shares held by foreigners took up 42.34 percent of the total market capitalization in February, compared with 30.08 percent in 2000 and 18.68 percent in 1998.
Foreigners have also strengthened their presence in the asset management market, with market share reaching 16.39 percent at the end of last year, more than doubling from a year ago.
Growing Opposition to Foreign Capital
With more Korean financial firms falling into the hands of foreigners, there has been growing opposition to foreign capital among Korean people. Many Koreans are concerned that the rise of foreign participation may hinder the coordination of stabilization efforts by the government and financial firms during times of financial turmoil and thus result in a loss of financial sovereignty
They stress that Korea should learn from Mexico, which faced loss of economic sovereignty. After the currency crisis in 1995, Mexico pursued sweeping restructuring and privatization in the banking sector. But through this process, most Mexican banks came under foreign capital control. Only one out of the six big commercial banks in Mexico is managed by domestic capital today.
Early this year, Kookmin Bank president Kang Chung-won expressed concern over the growing foreign presence here, saying, ``Korea has an abnormal financial market structure where profits made from performance by Koreans go into the pockets of foreigners.’’
Even the government has become more vigilant about attracting foreign capital after expensive lessons from a series of foreign investment cases, including the one involving Newbridge Capital.
The government has regretted the sale of the KFB to Newbridge, after concluding that the sale did not generate any positive effects for the local financial market. ``It is unfortunate that the sale of KFB to the U.S. fund did not generate any positive effects. The government will not make such a mistake again in future,’’ Former Finance-Economy Minister Lee Hun-jai said.
In this backdrop, the government has introduced a more rigid regulation system to enhance monitoring of the character and nature of foreign capital. As part of that plan, it decided to restrict the number of foreign directors at Korean banks to less than half of the total board members. It also enacted a law to promote the establishment of homegrown private equity firms.
In a separate move, the Bank of Korea has recently submitted a report to Chong Wa Dae demanding more stringent regulation against foreign speculative funds, such as hedge funds and private equity funds.
Regarding opposition to foreign capital, many experts warn that emotional opposition to foreign capital and excess restrictions will scare away good foreign capital, having a negative effect on the nation’s financial market and ongoing hub project.
``Opposition to foreign capital is dangerous and will cause trouble in the future,’’ Korea Institute of Finance economist Jung Han-yung said. ``The restrictions could have the effect of deterring good foreign investment in Korean financial firms.’’
Barclays Capital economist Dominique Dwor-Frecaut also said that resentment against foreign capital will deprive Korea of much needed foreign expertise and capital.
Financial Industry Still at Crossroads
Although the Korean financial industry has overcome the crisis today, it is yet to reach a level of advanced nations and still stands at a crossroads. Many turnarounds are not yet complete, and there are still too many unnecessary barriers to successful global integration.
Experts say that Korea should not create more restrictions to foreign investment because it needs the presence of both strong Korean financial firms and strong foreign firms in order to upgrade the financial market to international standards and realize its hub vision.
They also stress that the government should further liberalize the financial sector by removing regulation barriers between industries so that local financial firms can compete with foreign counterparts.
Former AMCHAM chairman Jeffrey Jones said that under the current regulatory system, banks, securities and insurance companies are only able to offer products and services that the government specifically permits.
``This puts Korean financial firms at a tremendous disadvantage. However, if a product or service is not prohibited, they are free to engage in any service or activity they wish,’’ he added. ``This gives them much greater flexibility in management and permits them to be much more creative in providing products and services to customers.’’
Graham at IIE said that it is important for Korea not to create major disincentives to foreign investment in the Korean financial sector.
``Korea should recognize that international financial centers, such as New York and London, are just that foreign-owned firms are as prevalent in these centers as are domestically-owned ones,’’ he added.
``So, there can be a major trade-off between Korea’s goal to emerge as a strong regional financial hub and the goal of some Koreans to keep the Korean financial sector largely under domestic control,’’ he added. ``If the second goal is pursued, the first is simply not likely to be achieved.’’
The experts stress that since there have been more cases for foreign capital to have a positive effect on the local market, Korea should make efforts to prevent a few bad examples, including the one involving Newbridge Capital, from deterring the continuation of a process that will, in net, produce a positive outcome.
What effect will it be in your view, sir?
ReplyDeleteWhat effects will be in your view, Sir?
ReplyDeleteI wanna know that too. Thanks.
ReplyDeleteHello:)
ReplyDeleteKorean is a beautigul Country,I hope I can travel to there in future
ReplyDeleteSince the fiscal crisis of 1997 and the subsequent financial restructuring in South Korea, foreign investment has soared. One of the consequences of this influx of capital is foreign investors demand a say in corporate governance...once solely directed by either the government or the family-managers. Over the past several years the dominant role of family management has been eroded and threaten (for example at SK). Two trends might evolve. 1. The family-managers will find new ways to consolidate their control over their conglomorates Or, 2. International investors will force out the family managers and install Western model management to run the Korean conglomorate.
ReplyDeleteThank you very much for your reply :)
ReplyDelete