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Financial Hub Initiative in Korea. February 2007. Ministry of Finance and Economy. I. IV. Why Finance?. Future Plans. II. Strategy for Financial Hub Promotion . III. Major Accomplishments. Table of Contents. 1. I. Why Finance?. i. Why Finance? (1/3).

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Financial Hub Initiative in Korea

February 2007

Ministry of Finance and Economy


I

IV

Why Finance?

Future Plans

II

Strategy for Financial Hub Promotion

III

Major Accomplishments

Table of Contents

1



i. Why Finance? (1/3)

A New Growth Engine for the Korean Economy

Employment trend by industry

Unit: Million

Services

Manufacturing

Agriculture


i. Why Finance? (2/3)

A New Growth Engine for the Korean Economy

Financial industry’s contribution to GDP

Unit: %

  • Increased in Value Added (’00) : 50 billion Dollar

  • Increased in Production (’00) : 100 billion Dollar

  • Increased in Employment (’00) : 9 billion employees


Agriculture

Manufacturing &

Construction

Services

i. Why Finance? (3/3)

A New Growth Engine for the Korean Economy

Employment structure (’06)

  • Services Industry

  • U.S : 78.4%(’04)

  • G7 : 71.5%(’04)

  • OECD : 69.0%(’04)


II. Strategy for

Financial Hub Promotion


I. Strategy for Financial Hub Promotion (1/4)

Financial Hub

Clear Goals

Strategic Roadmap

3-Stage

Development Plan

2


Clear Goals for Financial Hub Promotion

Growth

of

financial markets

Internationalization

of

financial transactions

Attraction

of

financial companies

Performance Index (e.g.)

  • Number of foreign

    financial companies

    in Korea

  • Number of world’s top 50

    asset management

    companies in Korea (Inc.

    regional headquarters)

  • Volume of bond issuance compared to GDP

  • Volume of non-resident bond issuance

  • Size of fund market compared to GDP

  • Volume of PEF

  • Index for globalization of finances*

    * (FDI + Volume of Portfolio)/GDP

  • Weight of overseas asset management activities

I. Strategy for Financial Hub Promotion (2/4)

3


I. Strategy for Financial Hub Promotion (3/4)

Strategic Roadmap

Attraction of foreign financial institutions

< Leading business >

< Following business >

  • Capital market

  • - Asset management business

  • - Restructuring market

  • - Private equity fund (PEF)

  • Foreign exchange market

  • Insurance market

  • Commercial banking

Development of finance market

Foreign exchange

liberalization

Financial system

deregulation

Financial supervision

renovation

Business and living

environment improvement

Creation of solid financial infrastructure

4


I. Strategy for Financial Hub Promotion (4/4)

3-Stage Development Plan

Regional

Financial Hub

Niche

Financial Hub

Primary Stage

Growing into

a financial hub

in Asia

Specializing in

asset management

business

Establishing

solid financial

infrastructure

( ~ 2015)

( ~ 2010)

( ~ 2007)

5



3rd Phase

(’08~’09)

2nd Phase

(’06~’07)

1st Phase

(’02~’05)

Complete liberalization

except for

safety measures

Gradual

deregulation

Red-tape

reduction

i. Reform Measures for Solid Financial Infrastructure(1/4)

Liberalization of Foreign Exchange Market

  • Eliminate the lingering restrictions on capital account transaction

    * Abolish capital account transaction permission system (Jan. 2006)

  • Accelerate the timetable for the complete liberalization

  • - by year 2011 by year 2009

  • FX Liberalization Plan

7


Present

Future

  • Securities and Exchange Act

  • Futures Trading Act

  • Act on Business of Operating

    Indirect Investment & Assets

  • Trust Business Act

  • Merchant Banks Act

  • Corporate Restructuring

    Investment Companies Act

  • Specialized Credit Financial

    Business Act

“Consolidated

Capital Market Act”

Positive List System

“Negative List System”

i. Reform Measures for Solid Financial Infrastructure(2/4)

Introduction of the Consolidated Capital Market Act

8


i. Reform Measures for Solid Financial Infrastructure(3/4)

Establishment of Market-Friendly System

  • Setup more Reasonable Financial Supervision System

  • Introduce no-action letter system (Jul. 2005)

  • Disclose supervision manual (Aug. 2005)

  • Strengthen remedy for violation of private right (Aug. 2005)

  • Launch 「fn HUB Korea」(Jan. 2006)

  • Communication channel btw government & market participants

    (e.g. EUCCK, Amcham, FBG, foreign embassies in Korea etc.)

  • In-depth door to door interviews on foreign and domestic

    financial companies

  • 48 finance related laws were translated in English

  • One-stop grievance handling

9


i. Reform Measures for Solid Financial Infrastructure(4/4)

Build-up of Institutes to develop Finance Professionals

  • Open「Graduate School of Finance 」at KAIST (Mar.2006)

  • Attract renowned scholars through active recruitment

    - Open lecture series of eminent faculty from abroad (Sep. 2006)

    - Promote to recruit world’s top 100 research scholars in finance

  • Construct relationship with world renowned institution

    - KAIST-Reuters (Oct. 2006), KAIST-KDB (Mar. 2006)

  • Launch「Financial Skills Network Center」(Jun. 2006)

  • Survey on statistical status of financial professionals

    & recruiting plan in financial institutions (Sep. 2006)

    - Publish annual reports of financial skills availability starting from year 2006

10


ii. Improvements to enhance Competitiveness (1/4)

  • Lighten investment limit for ‘fund of fund’

    * Ratio limit : 50% 100%

  • Reduce the minimum capital requirement

    for asset management companies

    * Capital requirements : 10bn won 3bn won

Asset Management Market

  • Establish ‘Consolidated Stock Exchange’ (KRX)

    (Jan. 2005)

  • Complete restructuring on investment

    trustcompanies (May 2005)

Build Market

Infrastructure

Increase

Demand for

Assets under

Management

  • Introduce retirement pension (Dec. 2005)

  • Increase outsourcing ratio of pension funds

    *3.3%(’03) 8.7%(’04) 10.9%(’05)

Relax

Related

Regulations

13


ii. Improvements to enhance Competitiveness(2/4)

Increase

Issuance of

Long-Term

Bonds

Bond Market

  • Issue 20 yr. government bonds successfully

    - Monthly issue 550 bn Won from January 2006

  • Reform of bond issuance procedure for foreign

    investors’ easier access to the market

    (e.g. Permit the international accounting standards & American

    accounting standards(Dec. 2004))

  • Issuance of Kimchi bonds worth of $300 mn

    by Bear Stearns (Jun. 2006)

  • Issuance of Arirang bonds worth of $ 500 mn (Jan. 2007)

Internationalize

Bond

Market

Innovate

Market

Infrastructure

  • Create environment for foreign credit rating

  • Ease agencies’ entry into domestic market (Jul. 2006)

    - Requirement of the number of professionals : 30 20

14


ii. Improvements to enhance Competitiveness(3/4)

Restructuring Market

  • Amend KAMCO act and allow investment of overseas

    non-performing assets (Feb.2006)

  • Collect information of restructuring markets in Northeast Asia

  • Introduce PEF through ‘Indirect Investment Asset

    Management Business Act’ (Apr. 2004)

  • Broaden range of investors and increase flexibilities in investment

    (Jun. 2006)

    - Permit the investment of venture capitals

    - Lighten requirements for SPC shareholders

15


ii. Improvements to enhance Competitiveness(4/4)

Establishment Of KIC (Jun. 2005)

  • Build Infrastructure for Asset Management

    - Establish IT, risk management & evaluation system (Jul. 2006)

  • Build Mid-Long Term Investment Policy (Sep. 2006)

    - Build investment manual (e.g. investment principle, investment asset group)

  • Finalize Asset Trust Contract

    - Bank of Korea : $ 17 bn (Jun. 2006)

    - Ministry of Finance and Economy : $ 3 bn (Sep. 2006)

  • Start Investment

    - Invest $1 bn through bond passive index (Nov. 2006)

16


iii. Market Performance by Sector (1/5)

Stock Market

Total Market Capitalization

USD billion

  • 95 % Increase in the last 3 years.

1,568

  • Revaluation on the

    Korean Market

  • Increase of investment pool

    (e.g. Installment funds)

1,000

836

723

750

  • Share of institution investors

    *15.58 % (’03) 18.56%(’05)

  • Longer investment horizon

  • 429

    • Qualitative changes

    500

    357

    250

    0

    ’04

    ’05

    ’06.11

    Hong Kong

    (’06.11)

    Singapore

    (’06.11)

    17


    iii. Market Performance by Sector (2/5)

    Bond Market

    Outstanding amount of Issued Bonds

    • Steady annual increase

    • Issue 20 yr. treasury bonds

    • successfully

    USD billion

    1,000

    838

    765.1

    750

    673.5

    500

    250

    0

    ’04

    ’05

    ’07.1

    18


    iii. Market Performance by Sector (3/5)

    Foreign Exchange Market

    Daily Trading Volume of Foreign Exchange

    USD billion

    150

    125.0

    102.0

    • Almost doubled

    • in only 3 yrs since 2004

    100

    32.0

    50

    22.3

    18.6

    0

    ’04

    ’05

    ’06

    Hong Kong

    (’04)

    Singapore

    (’04)

    19


    iii. Market Performance by Sector (4/5)

    Asset Management Market

    USD billion

    USD billion

    400

    378.9

    300

    259.7

    315.9

    298.9

    201.4

    300

    200

    179.2

    200

    172.0

    121.1

    100

    100

    0

    0

    ’03

    ’04

    ’05

    ’06

    ’03

    ’04

    ’05

    ’06(P)

    Assets Under Management

    Pension Funds Operation

    • No. of foreign asset mgt. companies in Korea : 6(’02) 14(’06)

    20


    iii. Market Performance by Sector (5/5)

    Derivatives Market

    Transaction Volume

    • Trading Volume

    • KOSPI200 Futures : 4th in the World

      * 1.10(’03) 1.92(’05)

    • KOSPI200 Options : 1st in the World

      * 13.59(’03) 30.33(’05)

    USD Trillion/yr

    38.0

    40

    30

    25.7

    18.0

    20

    10

    0

    ’03

    ’04

    ‘05

    21


    iii. Market Performance by Sector (6/6)

    NPL acquired

    (USD bn.)

    39.7

    Contracted

    (USD bn.)

    4.9

    Invested

    (USD bn.)

    1.08

    NPL resolved

    (USD bn.)

    30.2

    Restructuring Market

    PEF Market

    • Major vehicles

    • CRC, CRF, CRV, KAMCO

    • KAMCO play a critical

    • role in the NPL market

    • Introduced in 2004

    • 20 PEFs established

    • (as of Nov. 2006)

    22


    Financial Industry Status by Sector (end of 2006)

    (Unit : No.)

    38

    (Branch)

    * Criterion for foreign financial company : Over 50% share + the right of management

    25



    i. Improvements of Financial Infrastructure(1/2)

    • Accelerate Comprehensive Financial Deregulation

    • Third round ‘Zero-Base Deregulation’

      (40 Laws, 639 Tasks)

    • Focus on 4 major function

      - Area of focus : business operation, corporate finance, consumer

      protection, finance sanction

    • Enact the ‘Consolidated Capital Market Act’

    • Wait for the enactment by the National Assembly

    27


    i. Improvements of Financial Infrastructure (2/2)

    • Execute Foreign Exchange Market Liberalization

    • Facilitate the rescheduled FX liberalization

    • Promote internationalization of Korean Won, vitalize overseas investment

    • Innovate the Financial Supervisory System Continuously

    • Encourage the use of no-action letter system

    • Improve regulatory regime under the proposed ‘Consolidated Capital

      Market Act’

    • Establish legal base for the ‘Financial Hub Initiative’

    • Clarify the principle of enhancing transparency & accelerating

    competition in the financial market

    • Enact the ‘Financial Hub Promotion Act’

    28


    ii. Development of Financial Markets(1/2)

    PEF

    Market

    Asset

    Management

    Market

    · Enlarge the size of securities companies

    · Develop models for Korean investment

    banking services

    • Promote competition in asset management business

    • Increase outsourcing ratio of pension funds

    • Activate retirement pension

    • Increase the autonomy of PEF operation

    • Attract more participants in PEF market

      (e.g. Venture capitals, insurance companies)

    Investment

    Banking

    29


    ii. Development of Financial Markets(2/2)

    Derivative

    Market

    Bond

    Market

    · Build information portal of restructuring markets

    in Northeast Asia

    · Foster leading market participants of the Northeast

    Asian market

    • Enlarge the issuance of long-term bonds

      continuously

    • Attract more foreign investors into the Korean bond

      market (e.g. Arirang Bond)

    • Ease regulation on OTC derivative products

      * Positive system negative system

    • Diversify the listed derivative products

    Restructuring

    Market

    30


    iii. Leading the Way in Northeast Asia

    • Strengthen the role of KIC

    • Establish the International Financial Services

      Center (IFSC)

    Attracting Foreign Financial Institutions

    Globalization

    of

    Korea Exchange

    • Promote foreign companies’ listing in KRX

    • Have strategic alliances with overseas

    • Export Korean financial IT / financial system

    • Channel various types of funds

      (e.g. e-Asia Fund* (ADB), ODA)

    Active Role

    in Regional

    Finance

    Infra

    Project

    31


    New Growth Engine for the 21st century

    New Business Opportunities

    Korean Economy

    Foreign Investors

    Financial Hub Strategy

    Prosperity in the Future

    33



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