For Financial
Hub in N.E. Asia
Taking measures to ease regulations for freer financial market

Korea is at the throes of making its financial market sophisticated enough to be a financial hub in Northeast Asia. It has relaxed its foreign exchange regulations to allow more liberal overseas investments by domestic investors on March 2, Kwon Tae-kyun, director-general of the International Finance Bureau of the Ministry of Finance and Economy said in a written interview with NewsWorld recently.
The move is also part of the government effort to solve the structural imbalance in the foreign exchange market due to the chronic oversupply of foreign currencies.
Following are excerpts of the interview for NewsWorld's special report on the occasion of the Asian Development Bank's 39th annual Board of Governors Meeting May 3-6 in Hyderabad, India.
Question: Can you please explain to our readers your ministry's plan to free up overseas investments for Korean investors?
Answer: The government started to make the move to solve the structural imbalance in the foreign exchange market due to the chronic oversupply of foreign currencies. On March 2, the Ministry of Finance and Economy announced the measures to relax the foreign exchange regulations to allow more liberal overseas investments by domestic investors. The move is also part of the government strategy to build an international financial hub in Northeast Asia step-by-step, and the plan which has been pushed continuously since last year for spurring overseas investment by domestic investors.
The measures have completely removed the investment limit on buying a house to live in foreign countries set at $1 million, along with the requirement that the houses should be sold within three years from the date of returning to the home country. It also has stricken off the limit on individuals on their foreign direct investment set at $10 million, along with broadening financial support to overseas investors by expanding loans available from the Korea Exim Bank and currency swap limits related to foreign currency loans for large projects intended to explore natural resources in foreign countries.
It also deleted the limit on purchasing foreign company shares in foreign countries by individual direct investors in the country as well as easing restrictions on investments in both domestic and foreign funds to invigorate portfolio investments overseas. The collection responsibility on external credit has been eased by increasing the threshold amount from $100,000 to $500,000 per case. The regulations on the requirement to report overseas deposits to the National Tax Service has also been eased. The deposits up to $10,000 per year per case should be reported to NTS every year, but the minimum amount has been increased to $50,000.
In a bid to support further development of the foreign exchange market, the foreign exchange positions of foreign exchange banks have been increased to 30 percent of the banks capital at the end of the preceding year from 20 percent.
Owing to the government's continuous relaxation of its rules to invigorate overseas investments by Korean nationals, the investment has been rising coming into this year. Last year, purchases of real estate overseas totaled $8.73 million for the whole of last year, but it totaled $4.8 million over 13 cases in January, in February, it came to $11.25 million over 36 cases, $8.28 million over 22 cases as of March 15.
The number of rights to use real estate facilities in foreign countries totaled 8 cases in the first half of last year, but it Jumped to 100 cases in the second half. It totaled 35 cases in January alone this year.
In mid-to long-term perspectives, the measures will stabilize the foreign exchange market by solving the imbalance in the supply and demand of foreign exchange.
MOFE plans to hold consultations with the IMF advisory group even after the measures have been enforced for further development of the foreign exchange market. In the first half of this year, the government will announce the plan for early implementation of measures to further liberalize foreign exchange transactions.
Q: What are some of the measures taken against the side effects from real estate and foreign exchange liberalization measures?
A: It is true that there are some who voice concerns that illegal remittances of foreign exchange will be on the rise taking advantage of the relaxation of the regulations on overseas investment. As announced in November, last year, we will strongly enforce the measures to strengthen our supervisory role on foreign exchange transactions. We will also push measures to give the power to the Financial Supervisory Service to step up its activities to collect information on foreign exchange transactions and the ban on illegal uses of export proceeds and strengthen the supervisory role of the Korea Customs Service. Also, among the measures will include allowing the Bank of Korea, the central bank, to let the FSC to join in its inspection of the foreign exchange market if needed for stabilization of the market. It will also include measures allowing an access to information from the foreign exchange electronic network under the revised Foreign Exchange Law enforced from May 11 last year. KCS will not only be empowered to inspect foreign trade transactions and services, but also related capital transactions.
We have already strengthened the monitoring system through the Exchange Market Stability Consultation Council with the participation of related organizations and put into operation a special management system through the foreign exchange electronic reporting system.
Q: What are your measures to combat the rising value of the Korean won't Some 86 percent of the export firms totaling 865 surveyed by the Korea International Trade Association said they have hard time coping with the high value of won.
A: The Korean Won has been under appreciation pressure since 2002 due to the weakness of the U.S. dollar and this year, the Won't value jumped to the 950 and 960 won range this year already. The Won't value appreciated more than other currencies, doubling the difficulty for our exporters. The appreciation rates of countries'currencies vis-a-vis the U.S. dollar as of April 11 show: Korea(6.0%), Japan(△0.6), Euro(2.4), Taiwan(1.5), Singapore(3.4), Thailand(7.8), Indonesia(9.4) and China(0.8). The appreciation rates of currencies so far this year: Korea(4.5%), Japan(1.1), Euro(2.4), Taiwan(6.2), Singapore(3) Thailand(5.5), Indonesia(7.8), and China(0.6).
The exchange rates are to be determined at the market in reflection of the supply and demand and economic fundamentals.
The government's position has been that it should not interfere with the exchange rates, leaving it to the market.
But the foreign exchange authorities should make efforts to ease the difficulty for exporters due to the steep appreciation of the won currency by closely watching the rate movement. They have to stabilize the currency market if it is destabilized by abnormal means including the speculative currency attack or unstable market sentiment. They have to take actions within the boundary of necessary limit through smoothing operation if the market changes rapidly due to abnormal causes. The government will continue to maintain the stability of the foreign currency market through the relaxation of the foreign exchange regulations to induce a steady outflow of capital to keep the foreign currency market stable on mid-to long-term basis.
Trading companies, too, would have to make a great effort to cope with the foreign exchange rate changes more effectively through a positive crisis management system. The high value of the won would be an opportunity for exporters to upgrade the quality of their products.
Q: What are your views on the possibility of foreign credit rating agencies upgrading Korea's sovereign credit rating?
A: Last year, two out of three major credit rating firms upgraded Korea's credit rating. Standard & Poor's boosted it from A- to A on July 27 last year. Fitch upgraded it from A to A+ on October 24 of last year.
This year, we will try to have Moody's do likewise because its credit rating for Korea is lower than others; Fitch gave Korea its fifth highest rating AAA being the highest; S&P gave Korea its sixth highest rating; Moody's rated Korea its 7th highest rating. Moody's has been critical about North Korea's nuclear standoff. The six-party talks should make progress enough to agree on the action plan to follow up on a joint declaration to upgrade its rating on Korea, it feels.
The government, on the other hand, in an annual consultation with Moody's during February15-17, pointed at the progresses in the economy and in the North Korea's nuclear issues in the last three years to stress the rational for Moody's upgrading its credit rating on Korea, which has remained the same for the past four years.
Both Fitch and S & P would be prepared to upgrade their Korean credit ratings if Korea's labor market flexibility and the effectiveness of its credit guarantee system as part of accomplishment in the restructuring area are strengthened.
Accordingly, if we continue to make progress in the economy and the North Korean nuclear problems, we will be able to build a momentum for those credit rating firms to make additional upgrading of their Korean credit ratings.
Q: What do you think are prerequisites to North Korea's admission to Asian Development Bank?
A: Article 3 of the establishment agreement of the ADB states that to be its member country, the prospective member country should be a member of the United Nations and able to garner more than two/thirds of approval votes from all member countries and the approval of three/fourths of those countries that cast votes.
But realistically speaking, both the U.,S. and Japan and others who exercise important voting rights at international organizations would not allow North Korea to become a member of ADB before its admissions to both IMF and WB. Consequently, North Korea should be admitted to IMF first to become a member of ADB, therefore, it's hard to think about its admission to ADB alone as it is a matter of gaining admission to international financial organizations in general. World Bank also requires its member to become a member of IMF first before becoming its member under Article 2 of its establishment agreement.
Therefore, it is critically important to create an atmosphere conducive to key countries such as the U.S. and Japan to allow the North to be admitted to international financial organizations.
From a short-term perspective, advanced countries in particular the U.S. would not change their positions and be ready to approve North Korea's membership in international financial organizations unless such problems as counterfeit money, nuclear standoff and a terrorist support country stigma are resolved.
In case that the North is admitted to an international financial organization, it will have accesses to concessionary loans from the institutions and is able to meet part of its funds to develop its economy ultimately.
The government will keep in mind a number of factors to help the North including the progress in the six-party talks to create an atmosphere to induce key countries to change their policies toward the North and continue with its efforts to persuade the North to do its utmost to become the member of an international financial organization.
Q: What have been the plans for cooperation with Asian countries following the financial crisis of 1998 and their progress?
A: After the financial crisis, Asian countries learned a lesson that they need a joint effort among them to solve regional financial problems and to prevent them. They found out that the individual effort has its limit to handle the systematic weakness lying in emerging market.
The 3rd ASEAN+Three Summit held in Manila in November, 1999, adopted the Joint Statement for Cooperation in East Asia, reflecting a comprehensive cooperation in many areas in the region including politics, economy, and social issues, among others, for joint prosperity of East Asian countries.
In the economic area, the joint statement advised that the region should strengthen its cooperation on currency and financial matters through self-help and support mechanism in order to prevent the recurrence of foreign exchange crisis and stabilize the financial markets in the region.
The ASEAN+Three Financial Ministers Meeting has been upgraded to become the most important and effective forum for seeking joint cooperation to solve problems in the region's financial sector.
The 13 member countries make joint check ups on the region's economic and financial trends regularly and have been discussing cooperative means in East Asia including such issues as the Asian Bond Market Initiative and the Chiang Mai Initiative, a system for mutual financial support in the region. nw

Kwon Tae-kyun, director-general of the International Finance Bureau of the Ministry of Finance and Economy.