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February 2007

Financial Hub Initiative in Korea. February 2007. Ministry of Finance and Economy. I. IV. Why Finance?. Future Plans. II. Strategy for Financial Hub Promotion . III. Major Accomplishments. Table of Contents. 1. I. Why Finance?. i. Why Finance? (1/3).

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February 2007

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  1. Financial Hub Initiative in Korea February 2007 Ministry of Finance and Economy

  2. I IV Why Finance? Future Plans II Strategy for Financial Hub Promotion III Major Accomplishments Table of Contents 1

  3. I. Why Finance?

  4. i. Why Finance? (1/3) A New Growth Engine for the Korean Economy Employment trend by industry Unit: Million Services Manufacturing Agriculture

  5. i. Why Finance? (2/3) A New Growth Engine for the Korean Economy Financial industry’s contribution to GDP Unit: % • Increased in Value Added (’00) : 50 billion Dollar • Increased in Production (’00) : 100 billion Dollar • Increased in Employment (’00) : 9 billion employees

  6. Agriculture Manufacturing & Construction Services i. Why Finance? (3/3) A New Growth Engine for the Korean Economy Employment structure (’06) • Services Industry • U.S : 78.4%(’04) • G7 : 71.5%(’04) • OECD : 69.0%(’04)

  7. II. Strategy for Financial Hub Promotion

  8. I. Strategy for Financial Hub Promotion (1/4) Financial Hub Clear Goals Strategic Roadmap 3-Stage Development Plan 2

  9. Clear Goals for Financial Hub Promotion Growth of financial markets Internationalization of financial transactions Attraction of financial companies Performance Index (e.g.) • Number of foreign financial companies in Korea • Number of world’s top 50 asset management companies in Korea (Inc. regional headquarters) • Volume of bond issuance compared to GDP • Volume of non-resident bond issuance • Size of fund market compared to GDP • Volume of PEF • Index for globalization of finances* * (FDI + Volume of Portfolio)/GDP • Weight of overseas asset management activities I. Strategy for Financial Hub Promotion (2/4) 3

  10. I. Strategy for Financial Hub Promotion (3/4) Strategic Roadmap Attraction of foreign financial institutions < Leading business > < Following business > • Capital market • - Asset management business • - Restructuring market • - Private equity fund (PEF) • Foreign exchange market • Insurance market • Commercial banking Development of finance market Foreign exchange liberalization Financial system deregulation Financial supervision renovation Business and living environment improvement Creation of solid financial infrastructure 4

  11. I. Strategy for Financial Hub Promotion (4/4) 3-Stage Development Plan Regional Financial Hub Niche Financial Hub Primary Stage Growing into a financial hub in Asia Specializing in asset management business Establishing solid financial infrastructure ( ~ 2015) ( ~ 2010) ( ~ 2007) 5

  12. III. Major Accomplishments

  13. 3rd Phase (’08~’09) 2nd Phase (’06~’07) 1st Phase (’02~’05) Complete liberalization except for safety measures Gradual deregulation Red-tape reduction i. Reform Measures for Solid Financial Infrastructure(1/4) Liberalization of Foreign Exchange Market • Eliminate the lingering restrictions on capital account transaction * Abolish capital account transaction permission system (Jan. 2006) • Accelerate the timetable for the complete liberalization • - by year 2011 by year 2009 • FX Liberalization Plan 7

  14. Present Future • Securities and Exchange Act • Futures Trading Act • Act on Business of Operating Indirect Investment & Assets • Trust Business Act • Merchant Banks Act • Corporate Restructuring Investment Companies Act • Specialized Credit Financial Business Act “Consolidated Capital Market Act” Positive List System “Negative List System” i. Reform Measures for Solid Financial Infrastructure(2/4) Introduction of the Consolidated Capital Market Act 8

  15. i. Reform Measures for Solid Financial Infrastructure(3/4) Establishment of Market-Friendly System • Setup more Reasonable Financial Supervision System • Introduce no-action letter system (Jul. 2005) • Disclose supervision manual (Aug. 2005) • Strengthen remedy for violation of private right (Aug. 2005) • Launch 「fn HUB Korea」(Jan. 2006) • Communication channel btw government & market participants (e.g. EUCCK, Amcham, FBG, foreign embassies in Korea etc.) • In-depth door to door interviews on foreign and domestic financial companies • 48 finance related laws were translated in English • One-stop grievance handling 9

  16. i. Reform Measures for Solid Financial Infrastructure(4/4) Build-up of Institutes to develop Finance Professionals • Open「Graduate School of Finance 」at KAIST (Mar.2006) • Attract renowned scholars through active recruitment - Open lecture series of eminent faculty from abroad (Sep. 2006) - Promote to recruit world’s top 100 research scholars in finance • Construct relationship with world renowned institution - KAIST-Reuters (Oct. 2006), KAIST-KDB (Mar. 2006) • Launch「Financial Skills Network Center」(Jun. 2006) • Survey on statistical status of financial professionals & recruiting plan in financial institutions (Sep. 2006) - Publish annual reports of financial skills availability starting from year 2006 10

  17. ii. Improvements to enhance Competitiveness (1/4) • Lighten investment limit for ‘fund of fund’ * Ratio limit : 50% 100% • Reduce the minimum capital requirement for asset management companies * Capital requirements : 10bn won 3bn won Asset Management Market • Establish ‘Consolidated Stock Exchange’ (KRX) (Jan. 2005) • Complete restructuring on investment trustcompanies (May 2005) Build Market Infrastructure Increase Demand for Assets under Management • Introduce retirement pension (Dec. 2005) • Increase outsourcing ratio of pension funds *3.3%(’03) 8.7%(’04) 10.9%(’05) Relax Related Regulations 13

  18. ii. Improvements to enhance Competitiveness(2/4) Increase Issuance of Long-Term Bonds Bond Market • Issue 20 yr. government bonds successfully - Monthly issue 550 bn Won from January 2006 • Reform of bond issuance procedure for foreign investors’ easier access to the market (e.g. Permit the international accounting standards & American accounting standards(Dec. 2004)) • Issuance of Kimchi bonds worth of $300 mn by Bear Stearns (Jun. 2006) • Issuance of Arirang bonds worth of $ 500 mn (Jan. 2007) Internationalize Bond Market Innovate Market Infrastructure • Create environment for foreign credit rating • Ease agencies’ entry into domestic market (Jul. 2006) - Requirement of the number of professionals : 30 20 14

  19. ii. Improvements to enhance Competitiveness(3/4) Restructuring Market • Amend KAMCO act and allow investment of overseas non-performing assets (Feb.2006) • Collect information of restructuring markets in Northeast Asia • Introduce PEF through ‘Indirect Investment Asset Management Business Act’ (Apr. 2004) • Broaden range of investors and increase flexibilities in investment (Jun. 2006) - Permit the investment of venture capitals - Lighten requirements for SPC shareholders 15

  20. ii. Improvements to enhance Competitiveness(4/4) Establishment Of KIC (Jun. 2005) • Build Infrastructure for Asset Management - Establish IT, risk management & evaluation system (Jul. 2006) • Build Mid-Long Term Investment Policy (Sep. 2006) - Build investment manual (e.g. investment principle, investment asset group) • Finalize Asset Trust Contract - Bank of Korea : $ 17 bn (Jun. 2006) - Ministry of Finance and Economy : $ 3 bn (Sep. 2006) • Start Investment - Invest $1 bn through bond passive index (Nov. 2006) 16

  21. iii. Market Performance by Sector (1/5) Stock Market Total Market Capitalization USD billion • 95 % Increase in the last 3 years. 1,568 • Revaluation on the Korean Market • Increase of investment pool (e.g. Installment funds) 1,000 836 723 750 • Share of institution investors *15.58 % (’03) 18.56%(’05) • Longer investment horizon 429 • Qualitative changes 500 357 250 0 ’04 ’05 ’06.11 Hong Kong (’06.11) Singapore (’06.11) 17

  22. iii. Market Performance by Sector (2/5) Bond Market Outstanding amount of Issued Bonds • Steady annual increase • Issue 20 yr. treasury bonds • successfully USD billion 1,000 838 765.1 750 673.5 500 250 0 ’04 ’05 ’07.1 18

  23. iii. Market Performance by Sector (3/5) Foreign Exchange Market Daily Trading Volume of Foreign Exchange USD billion 150 125.0 102.0 • Almost doubled • in only 3 yrs since 2004 100 32.0 50 22.3 18.6 0 ’04 ’05 ’06 Hong Kong (’04) Singapore (’04) 19

  24. iii. Market Performance by Sector (4/5) Asset Management Market USD billion USD billion 400 378.9 300 259.7 315.9 298.9 201.4 300 200 179.2 200 172.0 121.1 100 100 0 0 ’03 ’04 ’05 ’06 ’03 ’04 ’05 ’06(P) Assets Under Management Pension Funds Operation • No. of foreign asset mgt. companies in Korea : 6(’02) 14(’06) 20

  25. iii. Market Performance by Sector (5/5) Derivatives Market Transaction Volume • Trading Volume • KOSPI200 Futures : 4th in the World * 1.10(’03) 1.92(’05) • KOSPI200 Options : 1st in the World * 13.59(’03) 30.33(’05) USD Trillion/yr 38.0 40 30 25.7 18.0 20 10 0 ’03 ’04 ‘05 21

  26. iii. Market Performance by Sector (6/6) NPL acquired (USD bn.) 39.7 Contracted (USD bn.) 4.9 Invested (USD bn.) 1.08 NPL resolved (USD bn.) 30.2 Restructuring Market PEF Market • Major vehicles • CRC, CRF, CRV, KAMCO • KAMCO play a critical • role in the NPL market • Introduced in 2004 • 20 PEFs established • (as of Nov. 2006) 22

  27. Financial Industry Status by Sector (end of 2006) (Unit : No.) 38 (Branch) * Criterion for foreign financial company : Over 50% share + the right of management 25

  28. III. Future Plans

  29. i. Improvements of Financial Infrastructure(1/2) • Accelerate Comprehensive Financial Deregulation • Third round ‘Zero-Base Deregulation’ (40 Laws, 639 Tasks) • Focus on 4 major function - Area of focus : business operation, corporate finance, consumer protection, finance sanction • Enact the ‘Consolidated Capital Market Act’ • Wait for the enactment by the National Assembly 27

  30. i. Improvements of Financial Infrastructure (2/2) • Execute Foreign Exchange Market Liberalization • Facilitate the rescheduled FX liberalization • Promote internationalization of Korean Won, vitalize overseas investment • Innovate the Financial Supervisory System Continuously • Encourage the use of no-action letter system • Improve regulatory regime under the proposed ‘Consolidated Capital Market Act’ • Establish legal base for the ‘Financial Hub Initiative’ • Clarify the principle of enhancing transparency & accelerating competition in the financial market • Enact the ‘Financial Hub Promotion Act’ 28

  31. ii. Development of Financial Markets(1/2) PEF Market Asset Management Market · Enlarge the size of securities companies · Develop models for Korean investment banking services • Promote competition in asset management business • Increase outsourcing ratio of pension funds • Activate retirement pension • Increase the autonomy of PEF operation • Attract more participants in PEF market (e.g. Venture capitals, insurance companies) Investment Banking 29

  32. ii. Development of Financial Markets(2/2) Derivative Market Bond Market · Build information portal of restructuring markets in Northeast Asia · Foster leading market participants of the Northeast Asian market • Enlarge the issuance of long-term bonds continuously • Attract more foreign investors into the Korean bond market (e.g. Arirang Bond) • Ease regulation on OTC derivative products * Positive system negative system • Diversify the listed derivative products Restructuring Market 30

  33. iii. Leading the Way in Northeast Asia • Strengthen the role of KIC • Establish the International Financial Services Center (IFSC) Attracting Foreign Financial Institutions Globalization of Korea Exchange • Promote foreign companies’ listing in KRX • Have strategic alliances with overseas • Export Korean financial IT / financial system • Channel various types of funds (e.g. e-Asia Fund* (ADB), ODA) Active Role in Regional Finance Infra Project 31

  34. New Growth Engine for the 21st century New Business Opportunities Korean Economy Foreign Investors Financial Hub Strategy Prosperity in the Future 33

  35. Thank you !

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