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SCMP Reporter

IT is a truly heroic tale. On a rocky, crowded and war-torn peninsula a small group of planners picks industries to develop.

   With the necessary capital fed to the right companies, they rocket the country to developed status in a single generation.

   Today, however, the alchemy that worked so well for decades in South Korea has worn off, observers say.

   A history of loans directed by the government has left banks with little ability to analyse risk, and bank and government officials open to graft.

  South Koreans are wondering how Hanbo Steel and General Construction Co was able to borrow US$5.8 billion from 61 banks and financial institutions, about 20 times its net worth. On January 23 it went bankrupt after failing to honour $6.35 million in promissory notes, sparking the collapse of its parent, Hanbo Group, the country's 14th-largest conglomerate.

 The debt was run up building a steel mill in Tanjin, which was planned to start production in May or June. Almost two years behind schedule, it has cost $6.7 billion - more than twice initial estimates.

  Some say the debacle reflects the swashbuckling egotism of South Korean businessmen who believe they can do anything and pay off any debt eventually if they can just get a loan to keep going. Chung Tae-soo, Hanbo's founder, insisted that just a further 300 billion won (about HK$2.67 billion) would have allowed him to complete the mill, but someone had to give him the money.

  South Korean prosecutors have charged Chung for his role in what is now being called the country's largest bankruptcy scandal.

  Observers say banks, not the government, should call the shots when allocating credit.

   Had investors analysed the risks, the plant, which is 90 per cent complete, may never have left the drawing board.

  'Government officials are a little divorced from the hard-nosed process of corporate decision-making,' Hank Morris at Koryo Securities in Seoul said. 'They won't lose their jobs if they guess wrong.' Bankers and businessmen do. That was not how it was during most of the five-year economic plans, which were used to expand the economy since the 1960s. The government divided the pie of available capital and then told the banks how much to lend to whom, and at what rates. Banks did not do independent credit analysis.

  'Banks were totally under government control,' Mr Morris said. [They] were simply rubber-stamping.'   Hongik University economist Kim Jong-seok said: 'By Western standards, Korean banks aren't banks. They're just money intermediaries.'   Self-assured Korean bankers become 'like bashful schoolboys who have done something wrong' when they entered the hallowed halls of Seoul's Ministry of Finance and Economy, one foreign observer says.

  As the government had the power to order the banks around, banks learned little about how to tell good projects from bad. And the government staff who controlled the funds could be influenced by companies that wanted money badly enough.

  A survey in the Choong-ang Ilbo daily newspaper found that 95 per cent of South Koreans believe that Hanbo Steel had to have a political connection to get such big loans. There is good reason for their suspicion.

  Chung was involved in graft and lobbying scandals in 1991 and in the course of building the steel mill, Hanbo was suddenly extended three trillion won in loans in a single year.

  Opposition politician Kim Keun-tae said: 'We don't have a direct witness, however our people feel it would have been impossible without support.'   Opposition parties are making hay over what could be the biggest scandal of President Kim Young-sam's administration. Opposition leader Kim Dae-jung says the president himself should be investigated if necessary. Others have fingered the president's son as having a role in the bankruptcy.

   Investigators have put an international travel ban on more than 40 bankers and company officials and are searching company offices for incriminating documents.

  Senior prosecutor Choi Byung-gook said: 'He [Chung] is accused of writing US$55 million of bad cheques.'   The Koomin Daily quoted a prosecution official saying that about 30 politicians and 20 government officials were suspected of having received bribes from Hanbo.

  Once Hanbo is bailed out and given new management, a much bigger problem must be taken care of. Analysts say that if the government does not successfully disengage from business, allowing companies and banks to assume the risks of decision-making, there may be more Hanbos.

  H G Asia analyst George Goundry said: 'At some point you've got to decide, 'yes we've succeeded in building a national economy and now we're going to wean corporate Korea off of government support and go out into the world on it's own terms'.'   Gweon Sung-chull, a financial writer at Choong-ang Ilbo , said: 'It's time to abandon government-directed economic development.

  'By doing so, banks will find a way to survive, at last.'   Most observers suggest opening the capital markets, expanding the range of businesses financial institutions can engage in, and allowing mergers and acquisitions among banks.

  Steve Marvin at Ssangyong Securities says a year ago the government made quantum leaps in modernising the financial sector. These included lifting caps on lending rates, and abolishing a quota system for allocating loans.

  Last summer, however, amid gloomy economic data a nervous government tightened up 'administrative guidance', Mr Marvin said.

  Ironically, a presidential commission on financial industry reform was launched a couple of days before Hanbo went bankrupt. Billed as a way to eliminate the inefficiency and backwardness of the financial industry, it has not inspired much hope. Analysts say businessmen on the committee will impede progress. Being the clients of banks, they will simply want lending rates and requirements cut.

  The ministry of finance and economy does not like the commission either. It thinks its own timetable for finance reform is fine.

  Policymakers are taking a gradual approach to deregulating the financial industry. They say liberalising capital markets too fast will invite 'hot money' into their economy. While international interest rates are about 6 per cent, Korean rates are 12 per cent.

  This disparity could encourage a flood of speculative short-term investment, driving up the won and killing off exports. When the investments are pulled out, they could leave a peso-style currency collapse in their wake.

  Koreans also worry that their banks are not up to par. Time is needed for the sector to consolidate and gain experience assessing risk before exposure to competition, they say.

  Gweon Sung-chull, a financial writer at Choong-ang Ilbo , says government officials are also reluctant to loosen control on economic policy in general. Bureaucrats have a successful track record and feel that, as the government, they hold the highest level of responsibility.

  And, the financial writer says, if they lose the authority to direct investments, they will lose some of their perks and prestige: 'If everything is freed, nobody will call them . . . They will lose their privileges.'   Back at the steel mill, operations continue as normal. On Tuesday, the finance ministry offered US$7 billion for firms and projects hurt by the bankruptcy, and reopened Hanbo Steel's current account.

  When completed, it will be the world's sixth-largest mill, producing five million tonnes of steel products a year.

  In government ministries, bureaucrats are searching for someone to take over the mill's management. Pohang Iron and Steel Corp, the state steelmaker, understands the technology at Hanbo but if it moved in it would create a monopoly in South Korea.

  Hyundai, which has long lobbied for a mill of its own, is a likely candidate. For now it is reticent, saying it had only wanted a conventional mill with an iron ore blast furnace.

  Analysts say it may be holding out for a sweeter deal - a better payment schedule, and not so much debt.



Hanbo failure exposes shortcomings of banks