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SCMP Reporter

THE Hermit Kingdom has embarked on a three-pronged drive to loosen its tightly-bound financial markets.

   Five-year programmes already under way will open the financial industry to foreigners, remove controls on capital inflow and outflow, and dismantle the tight regulatory framework in which the financial markets are enmeshed.

   Earlier this month, the South Korean Government unveiled plans to expand foreign direct investment, which is slowly picking up after falling from its 1988 peaks.

   The move is an acknowledgement of South Korea's need for foreign investment and the problems - such as high production costs and labour strife - which have traditionally deterred funds.

   It is also linked to the country's bid to join the Organisation for Economic Co-operation and Development (OECD) in 1996.

   Under the scheme - which advances relevant clauses drafted in the Five-Year Foreign Investment Liberalisation announced last year - the government aims, in the medium to long term, to provide equal opportunities for investment and competition to Koreans and foreigners.

   Some 57 businesses - from poultry slaughtering to real estate to wedding chapel services - singled out in the previous plan will now be eligible for earlier or additional liberalisation.

   Technical steps will be taken to provide additional assistance to foreign investors in the sticky areas of finance, tax, labour relations, securing factory sites and technology protection.

   These measures include:     Credit guarantees granted under the same conditions as domestic firms.

    Lifting the ceiling on offshore short-term borrowing for foreign-invested companies employing high technology.

    Revision of corporate tax rates and improvements in accounting systems.

    Offering specific high-technology businesses five years' grace on profits tax, and a halved bill for the following three years.

    Step-by-step improvements to ''inconsistent and unreasonable labour-related laws and practices''.

    Introduction of a wage system linked with output.

    Creation of a Silicon Valley in Korea, with complexes designated for foreign businesses.

   One private-sector economist said: ''I believe the liberalisation schedule should be hastened, because the situation is changing so fast, and I believe there are more and more discussions on that matter within the government and among governments.

   ''So as time passes, we can expect speedier liberalisation than that announced in the five-year plan.''    However, even this sudden spurt does no credit to South Korea's status as one of the four ''first-wave'' Newly Industrialised Economies - it is a drive which younger economies, such as Indonesia and (tentatively) China, have already begun, prompting many to suggest that South Korea has perhaps left it a little late.

   Also, the speed in this field which so clearly serves the country's own interests - the need for foreign investment and high technology, plus the need to clear hoops in order to qualify for OECD membership - also underlines laggardly attitudes in other areas of equal importance to foreigners: freer capital inflows and outflows; access to a wider range of debt instruments and other cash-raising vehicles; and a larger role in the capital markets.

   The stock market remains in many ways more nannyish than its Singaporean counterpart, which encourages irresponsibility on the part of quoted firms.

   To brokers' frustration, finance directors of even the largest companies refuse to grant an audience to visiting fund managers: the threat of a mass sell-off is always cancelled by the state's desire to protect shareholders.

   Cash calls, while growing, are far thinner on the ground than in other Asian markets such as Hong Kong.

   ''From the Korean's point of view, it's a zero-sum game - foreigners gain, so locals must be losing,'' said the branch manager of a French securities house, explaining the government's reluctance to forge ahead with deregulation in the financial markets.

   Another broker, believing the government is committed to liberalisation, questioned the mentality of the lower ministerial ranks and even the public, which views foreign funds and competition with an unsympathetic eye.

   Justifying its slowly, slowly approach, the government has amassed a heap of macro-economic fears - concerns dismissed as ridiculous and outdated by many private-sector economists. The state's reasoning is that the capital inflows unleashed by opening its markets will push up money supply and promote ''undue appreciation'' of the won.

   A Ministry of Finance official said: ''There is still a substantial gap between domestic interest rates and international interest rates so, if we open our markets at this stage, the capital movement would be quite sudden and we would have huge capital flows resulting in a sharp appreciation of our currency or an excessive liquidity causing inflationary trends.''    The won, which is linked to the US dollar in a widening trading band, has been steadily depreciating, giving exporters a strong, if artificial, competitive edge over the Japanese.

   However, Kyung Hwa Paik, senior analyst with Baring Securities in Seoul, rejects the government's arguments: ''The government is worried about a sharp increase in money supply because foreign currency cannot be held by companies, so it is translated into won.

   ''I don't think this is a big problem because already it is a big economy, especially in trading terms, so it is ridiculous for the government to stick to this outdated argument.''    In keeping with the gradual nature of reform, Seoul is this year lifting the annual ceiling on capital inflow to US$9.6 billion, from $6.4 billion last year, to increase liquidity.

   Most economists and analysts believe the will exists within the government to open up markets, and the lure of OECD membership and a shift in the economy towards higher value-added goods will provide strong impetus.

   The main challenge will be convincing the country that foreign competition, when married to foreign dollars, can be a good thing - and that it should push ahead before the second and third waves of developing economies can stake their claim to foreign attention.



Economists feel Seoul has fallen too far behind Asian rivals