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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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slide1

Financial Hub Initiative in Korea

February 2007

Ministry of Finance and Economy

slide2

I

IV

Why Finance?

Future Plans

II

Strategy for Financial Hub Promotion

III

Major Accomplishments

Table of Contents

1

slide4

i. Why Finance? (1/3)

A New Growth Engine for the Korean Economy

Employment trend by industry

Unit: Million

Services

Manufacturing

Agriculture

slide5

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
slide6

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)
slide7

II. Strategy for

Financial Hub Promotion

slide8

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

Financial Hub

Clear Goals

Strategic Roadmap

3-Stage

Development Plan

2

slide9

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

slide10

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

slide11

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

slide13

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

slide14

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

slide15

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

slide16

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

slide17

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

slide18

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

slide19

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

slide20

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

slide21

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

slide22

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

slide23

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

slide24

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

slide25

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

slide26

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

slide27

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

slide29

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

slide30

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

slide31

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

slide32

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

slide33

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

slide34

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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