Thursday, August 02, 2007
South Korea's financial markets
For those South Koreans who want to transform their sometimes insular country into an Asian financial hub, July 3rd was a momentous day. South Korea passed its own version of Britain's “big bang”, the 1986 deregulation that enabled London to become a global financial centre. In South Korea the legislation will remove bureaucratic barriers in its securities industry and help brokers, banks and possibly insurers to consolidate.
For those foreign bankers who wonder why anyone bothers to get off a plane in Seoul, a decision by a tax appeals court on July 5th sent just the opposite message. Lone Star Funds, a Texas-based buy-out firm, lost an appeal on a $110m assessment stemming from the lucrative sale of an office block held in what had been thought to be a tax-exempt subsidiary. The ruling refocused attention on what, for both Lone Star and South Korea, has been a public-relations disaster.
Back in 2003, when South Korea was stuck in a protracted slump, Lone Star was something of a hero. It came in when other investors would not and made investments that included taking control of a big bank. It seemed a shrewd bet. In the subsequent recovery, the returns were spectacular—too much so for some South Koreans, who believe that Lone Star got too sweet a deal. Well-publicised prosecutions followed a public outcry. Lone Star is now involved in two big trials and a number of smaller actions, all suggesting it manipulated figures in order to buy companies on the cheap or to avoid paying taxes. It is fighting the charges.
Lengthy lawsuits are not the only factors discouraging investment in South Korea. Foreign-exchange controls make it hard to repatriate profits. The local currency, the won, is not much use in global markets. Regulatory filings must be done in Korean. No foreign company has so far listed on Seoul's stock exchange. Legal barriers limit, or exclude, foreign law firms and accountants. Foreign hedge funds and private-equity firms have, with few exceptions, passed judgment with their feet and stayed away.
Most of the big financial institutions are present, but labour negotiations can be so wretched that many bankers consider the country toxic. Even lenient banks are not let off. Standard Chartered is viewed by competitors as a particularly accommodating employer in South Korea. But a union has festooned the lobby of its Seoul headquarters with hostile billboards.
And yet South Korea's good intentions should not be written off. Its advocates start by spreading a map. The country lies between Japan and China and has a good airport. Its people are well educated; many study abroad. Communications are excellent. In just a few years, Seoul has lost its gritty-city image and the country's television shows, movies and fashion have become hits throughout Asia. For an expatriate banker, it need not be a backwater. South Korea's stockmarket is hitting records, its banks are healthy, foreign-exchange reserves are strong and savings are growing.
More importantly, attitudes are improving. Restrictions on foreign lawyers and accountants are being relaxed; a free-trade agreement has been struck with America. A non-American banker says he was stunned to read the fine print of the deal and to see how much it helped his own business. At the moment, South Korea's financial ambitions seem quixotic, but no Asian market can boast of superlative disclosure and transparency. An opportunity exists for any country that gets it right.