MOVES by South Korea to open its economy to increased foreign investment are not all they seem. What the authorities described as 'significant' was, in fact, a symbol. What they referred to as 'momentous' was a mere token. Why are they being so two-faced? Over the past two weeks, two measures ostensibly designed to open the Korean market to more foreign money have been unveiled. First came the announcement overseas fund managers are to be allowed to operate 100 per cent owned operations in Korea for the first time. Then came the notice that foreign companies are to be permitted to seek a listing on the Korean exchange. The market liked the moves. Yesterday, South Korean share prices hit a record high for the year. But brokers were confused by the market's performance. They agree the fundamentals are in place to justify solid share price appreciation over time, but chose to describe yesterday's mood as 'hyper'. It was a prescient choice of word. Senior economists and Seoul-based representatives of international broking houses welcomed the recent liberalising moves, but warned their significance was muted. Keun Mo, head of research at Barings in Seoul, described the moves as a 'stunt'. The explanation for South Korea's decision to make a gesture rather than a genuine step goes beyond balance sheets. It was, said Philip Smiley, managing director of Jardine Fleming's Korean operation, to be found in Korea's global political ambitions. Mr Smiley pointed out South Korea was bidding to be a full member of the World Trade Organisation (WTO) as well as the Organisation for Economic Cooperation and Development (OECD). He highlighted comments made by South Korea's deputy prime minister to the International Monetary Fund which reiterated the country's desire to fully enter the global trade arena. International trade organisations are well aware of Korea's ambitions and have been exerting pressure on the Korean authorities to increase the speed of economic liberalisation if they want to be welcomed to the club. 'The Korean government is certainly feeling pressure from the international community to liberalise further,' Mr Smiley said. 'What is happening here is not really window dressing, but it certainly sounds better than it really is. They know that they have to open their markets to a reasonable extent to be accepted.' Andrew Freris, chief regional economist at Salomon Brothers, said: 'This has been designed to show people that moves to liberalise are being made. It's nice, but meaningless.' Adrian Corwell, a director at Kleinwort Benson's Seoul office, said: 'In addition to the OECD and the WTO, the Americans have their own agenda and have been pressurising the Korean government to liberalise further. This is a reaction to that.' So what's wrong with the recent moves? Concerning the decision to allow foreign companies to list on the Korean market, Mr Freris asked simply: 'Why? What for?' He said the idea of a Hong Kong or Singaporean company choosing to list in Seoul rather than on its local market was highly unlikely. Kleinwort Benson's Mr Corwell said the decision sounded good but was unlikely to attract many takers. He said Seoul was a liquid market with a range of institutions interested in investing in an overseas company, but added both of these benefits were available around the region. 'I certainly cannot think of any advantages for a company in doing so,' he said. Given the dubious practical applications of this measure, the argument that the Korean authorities are attempting to look good to the world gains credibility. The second move - to allow overseas fund managers to set up 100 per cent-owned operations in South Korea - received similar short shrift. Mr Smiley said: 'This is a move that is certainly in the right direction but is in the wrong time frame. What was not covered was that fund managers will not be able to open up here until mid-1998, which is too late.' Over the past 25 years, the average annual growth rate of the South Korean economy has been 8.1 per cent. Assuming this is matched in the years running up to the 1998 deadline, the economy will have grown by nearly a third by the time the fund managers are allowed in. As far as they are concerned, this is growth they could be participating in fully rather than waiting for on the sidelines. Once again, the measure sounds better than it is. While such measures may be politically expedient, they will certainly rile overseas institutions. As always, the bureaucrats are getting the blame. Mr Corwell said: 'These moves are often drawn up by bureaucrats. Quite often they are put together on an arbitrary basis and are not necessarily logical. Sometimes they are even changed at a later date.' Mr Freris drew attention to a similar announcement on the reduction of interest rates in which the Korean authorities committed themselves to a timetable. The timetable turned out to be unworkable and collapsed - as did some confidence in the government's promises. What really galls Seoul-based overseas institutions is the fact that there is a blatantly obvious way in which foreign money could be encouraged into South Korea. At present, foreign institutions are permitted to buy only 12 per cent of any Korean-listed company. This has led to a situation where Korea's blue-chip companies trade at a 'foreign premium' as international investors rushed to buy the shares before the 12 per cent limit was hit. Mr Smiley pointed out that the premium indicated the level of interest in local companies and suggested the authorities should relax significantly the 12 per cent limit - and fast. Next month, the limit is due to be raised to 15 per cent, but Mr Smiley still regards this as too little too late. He suggested the government commit itself to a timetable of relaxation and stick to it. 'We want a concrete timetable,' he said. 'We are seeing liberalisation, but is it fast enough? All we have are vague promises of a further increase.' He suggested that even the foreign investment limit was used for political reasons. 'This is a great tool to use to encourage a weak market. If the market flounders and drops, the Ministry of Finance is likely to announce that it will increase the limit to 20 per cent. If the market is roaring, the Ministry says it won't raise the limit. It's a tool.' These concerns aside, South Korea is making the kind of noises organisations such as the WTO and the OECD want to hear. It has played its political cards well and can rest assured it will be welcomed to the fold. But its mildly duplicitous tactics will have annoyed powerful international institutions on the way.
