Jong-yong Yim, chairman of the Financial Services Commission (FSC) in Korea, said on November 12, 2015 that one of the FSC future policies is to establish a financial hub in Korea. In particular, among Korean government proposals for elevating competitiveness of Korean financial sector, the creation and development of a financial hub recently receives attention. An established financial hub might be able to allow domestic financial companies to address to the foreign demand for financial services and induce the entry of foreign financial companies into Korean financial industry. Thereby, the creation and development of a financial hub would be new momentum for growth in Korean financial sector.
Our past experience tells that it would be a difficult task to create and develop a competitive financial hub in Korea, however. Korean government established the roadmap for the creation and development of Northeastern Asian financial hub in Korea as Presidential agenda in 2003, planned to implement a series of financial sector reforms, and announced that the future Korean financial hub would become one of three major financial hubs in Asia until 2020. However, the current consensus is that a financial hub in Korea has yet been successful and, as World Economic Forum (WEF) announced, the competitiveness in Korean financial industry has gotten worse from 27th rank in 2007 to currently 87th in the world.
Nevertheless, the following three recent changes in domestic and foreign economic environment should be notable as regards Korean government’s efforts for establishing a financial hub in Korea. First, since the last couple of year efforts by Chinese government for RMB (Chinese yuan) internalization, the IMF said on November 30, 2015 that it added RMB to its benchmark SDR basket. Chinese government also said that it continued to push for RMB internalization in the future. Second, RMB offshore financial hubs are important for RMB internalization as Chinese government takes a gradual approach to openness of its capital market and deregulation of its exchange rate manipulation. Therefore, for the time being Chinese government would support RMB offshore financial hubs. Lastly, since the visit of Xi Jinping, Chinese president, on July 3, 2014, China and Korea have agreed upon opening won-yuan direct market, assigning the Korean branch of Bank of Communications to become a RMB clearing house in Korea, and 80 billion RMBs of RQFII (RMB Qualified Foreign Institutional Investor) grant.
The above changes in domestic and foreign economic environment can be a new growth opportunity, if the creation and development of RMB offshore financial hub in Korea would become one of goals of Korean government’s financial hub strategies. A primary premise for the successful RMB offshore financial hub in Korea is that Korean government should be able to commit to policies for the creation and development of successful RMB offshore financial hub. As a result, the policies should not be subject to temporary shocks such as regime change in Korea and Chinese business cycle. Therefore, firms in Korea, which is involved in the business with China, will expand the use of RMB and international investors will purchase RMB financial products issued in Korean financial market. Based on descriptive analysis, this study proposes the following seven next steps that should be taken for the creation and development of successful RMB offshore hub in Korea.
First, RMB offshore hub in Korea should be developed in the way that the hub in Korea can have comparative advantage. In this sense, RMB offshore hub in Taiwan is the best preceding example for the future RMB hub in Korea. One of the major roles of the RMB offshore hub in Taiwan is to support Taiwanese firms which intend to move into Chinese market, because Taiwan is a country with the largest trade surplus against China and because Taiwan is closely related to China through trade in real sectors. Because financial market in Korea is less developed than Hong Kong, London, and Singapore, the derivative products issued by Korean financial firms would not compete against the products from those developed financial markets. On the contrary, there is a huge volume of trade flow between China and Korea like between China and Taiwan. In addition, Korea posts the second largest volume of trade surplus against China in the world. As a result, Korea could accumulate RMB if exporting firms in Korea are paid by RMB. To this end, policy makers in Korea should implement the mechanism through which those exporting firms in Korea will be paid by RMB in their transaction with Chinese companies.
Second, it is not desirable to use RMB secured through won-yuan swap arrangement between China and Korea for creating RMB financial products. Unlike London with developed financial market and huge amount of foreign liquidity, Korea does not have comparative advantage in issuing RMB financial products. RMB secured through won-yuan swap arrangement should be reserved for the purpose of stabilizing temporary shocks in the foreign exchange market.
Third, Korean government has been discussing about establishing a special administrative region in Sandong, where many Korean companies currently move into. The similar, previous case is Taiwanese special administrative region in Haixi, which actually helped Taiwanese companies to move into China. Because Korea had comparative advantage in labor intensive products in the past, the main factor to induce Korean firms to move into China was cheap labor. However, in the future the main factor is likely to be huge domestic demand in China. Therefore, it is necessary to implement policies to support Korean firms that intend to move into China due to domestic demand in China as well as establishing a special administrative region in China.
Forth, Korean branch of Bank of Communications is RMB clearing house in Korea. However, since October 2015, CIPS Level 1 has initiated as clearing mechanism in China. In particular, eight foreign banks including HSBC and SC, which have opened their branch in China, have chosen to participate in CIPS, since it is more advantageous than the other clearing mechanism. Therefore, as RMB clearing mechanism in Korea, it is necessary to choose among various alternatives including CIPS.
Fifth, it is necessary to accumulate RMB liquidity in Korea by fostering RMB bank deposit. Some of Korean domestic banks require RMB depositors in Korea to pay a commission instead of receiving interest. They argue that insuring won-yuan exchange rate risk is too costly. Since requirement of a commission to RMB depositors is criticized as one of obstacles that prevent the accumulation of RMB liquidity in Korea, policy makers should figure out the way to reduce the commission and expand domestic RMB deposit in Korea.
Sixth, RMB bond is important for successful RMB offshore hub, as seen in the other successful RMB offshore hub. However, it is not easy to expand issuance of RMB bond in Korea. As opposed to the other RMB offshore hub, we do not have good record keeping device and monitoring system about Chinese firms. Therefore, cooperation with Chinese financial institutions is necessary because they have comparative advantage in evaluating Chinese companies.
Seventh, it is necessary to foster financial institutions which can earn the sufficient amount of RQFII quarter, so that economy of scale arises in Korean financial industry. To this goal, in the long run, some financial institutions in Korea should be motivated to build specialty in Chinese industry and firms. Thereby, the financial institutions in Korea should be able to manage not only sales of financial products but also operation of financial products.