As of 2015, 48 percent of Southeast Asia’s population live in urban areas, which is below the world average of 54 percent. Although starting from a low base, Southeast Asia is urbanizing rapidly. Its urban population will surpass the rural population in 2020 and by 2050 approximately 65 percent of the region’s population will live in urban areas. Urban population, urban land area, and urban population density in Southeast Asia are all increasing at a rapid rate and the levels of urban primacy are high in most countries in the region.
Urban growth in Southeast Asia contributes to economic development and more so at higher levels of urbanization. This implies that urbanization needs to be reemphasized as an engine for economic development, and that policies to stimulate urbanization needs greater support. Yet Southeast Asia is not effectively leveraging urbanization for economic development. Due to high levels of congestion, pollution, and rents, many Southeast Asian cities are growing outward, not upward; failing to take advantage of agglomeration economies.
A timely supply of land and urban infrastructure, both inner-city and intra-city, is critical to the development of productive cities. However, in many Southeast Asian countries, government regulations are not in place and bureaucratic capacity is insufficient to implement effective land acquisition. Similarly, the lack of development finance and poor regulation environment makes infrastructure investment difficult. Land and infrastructure issues need to be addressed more aggressively given the rapid urbanization and the increase in urban density in Southeast Asia.
Decentralization poses another challenge for effective management of urban policy and development. Many Southeast Asian countries have undertaken devolution over the years and now a significant part of national spatial and urban planning and implementation are under the responsibility of local governments.
The poor coordination between national and local governments, low capacity of local authorities, and resulting inefficiency of urban policy have undermined urbanization for productive cities. Since decentralization will likely continue and intensify in the future, urban management must be reformed and the capacity of local governments need to be strengthened.
Focusing on land and infrastructure development, this report offers the following policy recommendations for Korea-Southeast Asia cooperation in urban development. First, Korea can provide technical assistance to Southeast Asia for the creation of a modern land management system including a cadastral system, land registration, and land information system. One fundamental obstacle to land acquisition for urban development in many developing countries is the lack of working cadastral and land registration system to effectively protect property rights. Transforming the legal frameworks for land registration may be difficult to implement due to domestic political economy issues, yet instituting technical foundations for land registration and information system may be more conducive to reform and international cooperation.
Second, Korea can share its experience in land development with Southeast Asian countries. Korea is one of the countries which successfully utilized compulsory land purchase for urban and infrastructure development. Korea’s public land acquisition has been credited with effective infrastructure development and urban and industry zone expansion, yet it has been criticised for infringing on citizens’ property rights. Thus, if Korea offers any lessons regarding its acquisition policy, it should focus on the recent improvements. Land reconstitution, another major type of land development other than land acquisition, should receive greater attention for international cooperation. Land reconstitution is less prone to conflicts than land acquisition and can be utilized for revitalizing inner cities and building new urban areas, which Korea has utilized quite successfully.
Third, Korea can contribute to capacity building of Southeast Asian countries in managing public-private partnership (PPP) for infrastructure development at a time when new opportunities are emerging with new infrastructure funds being launched. The lack of financing has been the major constraint in infrastructure investment in Asia yet the launch of China-led One Belt One Road and Asian Infrastructure Investment Bank, in addition to preexisting ADB-led Greater Mekong Subregional Economic Cooperation Program and ASEAN-led Master Plan on ASEAN Connectivity, is likely to ease this constraint. Cities are poised to benefit disproportionately from the coming Infrastructure boom as they are integral to the transportation networks central to such infrastructure expansion. These infrastructure funds are encouraging private participation and will likely promote PPP investment. Yet even though the funds become available, developing countries are not equipped with regulatory frameworks for effective management for PPP. Strong institutional frameworks to clearly define the role of the government and guarantee investment protection will be needed.
Enhancing government capacity and transparency as well as instituting conflict-resolution mechanism need to be emphasized. Korea’s experience with PPP development and management could provide an insight to Southeast Asian countries. 

 

North Korea’s financial system is based upon the mono-banking system centered around the Central Bank of the DPRK. The Central Bank of the DPRK serves diverse functions - aside from financial activities, it also acts simultaneously as a central bank and a commercial bank.
Such framework, however, underwent considerable changes with events such as the Arduous March and the monetary reform in 2009, along with weakening of state control and increase in marketization. The Central Bank’s function of providing capital has attenuated, with private finance filling the gap. Especially, the 2009 monetary reform triggered a spike in both the price level and exchange rates, sparking the disbelief towards the North Korean won and financial institutions as well as worsening the dollarization trend.
North Korea is facing challenges in utilizing domestic and foreign capitals to foster economic growth. The financial sector which is supposed to channel private saving into investment through financial institutions is malfunctioning, and North Korea’s nuclear issues makes it incapable of accessing the foreign finance market.
North Korea seems to know the significance of domestic finance in stimulating the economy, and is seeking to foster savings and absorb foreign capitals. The Central Bank Act or the Commercial Banking Law also indicates the nation’s willingness to move towards the two-tier banking system. However, North Korea’s current situation cannot be resolved merely through a partial change in operational methods nor through institutional adjustments and therefore a fundamental change is necessary in order for the financial system to fulfill its role as a catalyst for economic progress.
This research aims to use China and Vietnam’s experience of financial reforms to draw out implications for North Korea’s financial reform. Along with an analysis about current North Korea’s situation, we focus on China and Vietnam’s reform process, specifically from pre-reform to early institutional settlement phase.
Firstly, China had favorable economic conditions in 1978, at the beginning of the reform: stable price levels and growth rate, high savings rate with a strong government control. While The People’s Bank of China initially performed as a commercial bank before the reform, a switch to two-tier system and enactment of the Central Bank Law led to the establishment of policy banks, commercial banks and other financial institutions.
The savings rate was already high before the reform, and the government worked to guarantee the effective interest rate after the reform. There were policy efforts to increase the accessibility of banks such as depositing of wages into accounts, and there were few issues with the withdrawal. Extensive low-interest funds were provided to state enterprises at the initial phase of reform, which triggered large scale Non-Performing loans (NPLs). The NPLs were cleared out in 1999 with the formation of Asset Management Corporation, before the listing of National Commercial Bank.
Since the issuance of long-term treasury bond in 1981, measures such as the diversification of bond maturity and sales method or the permission of re-trading helped invigorating the loan market. After certain periods, the stock exchange market was established in the early 1990s with few listed companies. It initially experienced stock index spike and bubble burst, which led to the founding of a supervisory institution.
A dual exchange rate system separating the trade exchange and non-trade exchange rate was implemented, yet the official rate significantly diverged from the market rate. However, the two rates eventually converged, following the shift to a single exchange rate system in 1994. This was also the period when the inter-bank foreign currency market was set up.
Private loans emerged at some regions at the early phase of reform, but it was soon suppressed and merged into the system. Likewise, there were no noteworthy instances of dollarization.
Unlike China, Vietnam was having several difficulties ？ low growth rate, international isolation, hyperinflation as a repercussion of the failed 1985 monetary reform - when it took its first step towards reform.
To overcome such problems, the Vietnamese government adopted an openness policy called Doi Moi in 1986 which included financial reforms. The reform meant a change towards the two-tier financial system, and financial institutions such as joint banks, commercial banks, policy banks, and a number of credit cooperatives were established.
Vietnam’s savings rates were initially low, which can be attributed to distrust towards domestic currency and financial institutions due to experiences of hyperinflation and bankruptcy of rampant credit cooperatives (1991). After its relationship with international financial institutions normalized, financial support from such institutions and expansion in FDI were instrumental in securing the necessary financial resources. The government took various measures to mitigate distrust, such as stabilizing inflation, betterment of rural · provincial financial systems that replaced credit cooperatives, guaranteeing of real interest rates by gradually liberalizing interest rates, and improving of payment and settlement system. Besides, dollarization (foreign currency deposit / total currency deposit) worsened at the incipient phase of reform. Such phenomenon was eased by the stabilization of price level and currency, convergence of market and official exchange rate, and maintenance of the interest rate difference between domestic and foreign currency deposits.
Loan to state enterprise was a problem in Vietnam as well. While Asset Management Corporation was set up in 2013 to address the issue, its effects are not very clear.
In 1992, dong and foreign currency denominated treasury bonds with 1 to 3 year maturity were first issued, and maturity diversification and opening of circulation market (1995) followed. The stock exchange market opened in 2000 with 5 listed companies.
The discrepancy between official and market exchange rates resolved relatively quickly. In 1985, just before the onset of the reform, market exchange rate was almost 8 times the official rate, but the two rates converged in 1992. The foreign currency market was established in 1991.
From the experience of China and Vietnam’s financial reform, we derive several implications for North Korea.
With the enactment of the Law on Central Bank and Law of Commercial Bank, North Korea already has institutional foundations for financial reform. What matters is to draft and carry out specific plan for implementation, create an environment conducive to its enforcement, and to continuously practice the plan. It is imperative to ensure the explicit prohibition of financial asset provisions via central bank, guarantee smooth operation of commercial banks taking the primary role in savings and deposit, acquire substantive tools for currency and foreign exchange market operation, and stimulate both the capital and foreign currency market.
In order for the banking system to smoothly operate, one should first secure deposits as the main source of assets. This requires proper compensation for real interest rates, along with assuring the withdrawal of deposits, alleviating fear towards exposure of accumulated assets, and increasing familiarity with financial institutions such as depositing wage into accounts. This is especially the case for absorbing foreign currency deposits, and the issue of converting foreign currency deposits to won deposits should be a subsequent matter. NPLs are likely to occur at the initial stage of reform, which demands stringent supervision from the start, provision of mortgage system, and establishment of supervisory institution.
Considering the financial situation and the need to prohibit currency issuing for the purpose of financial funding, an early issuing of treasury bond seems to be desirable. Combined with foreign currency denominated treasuries, it should serve as a useful tool to absorb foreign currency. As the discrepancy between market · official exchange rates is much severe than China and Vietnam’s case, the problem of dual exchange rate needs to be urgently addressed. Also, there needs to be a foreign exchange market which all exchange banks participate. Accessing international financial market would cause desirable effects, such as the procurement of foreign assets, enhancing trust towards financial institutions by the operation of foreign institutions, learning from advanced financial techniques, and fostering the transparency of accounting system.
In conclusion, North Korea’s current situation involves myriads of system-wide problems that cannot be eased by a fragmentary approach. Overall reform in the financial sector that parallels marketization is crucial, and favourable environment for implementing reform should be created.
In order to normalize deposit and savings within the banking sector, private finance should be incorporated into the system. Donju’s experiences may come handy in managing financial institutions. Also, overcoming dollarization necessitates comprehensive and long-term approach along with consistent policymaking in order to recover from the mistrust. This should be accompanied by forestalling currency evaporation and ensuring reliable supply of foreign currency and resources.
Moving towards a market-based financial system demands a lot of experience and know-hows, thus one can make use of foreign capital and the entrance of foreign financial companies through an open-door policy. The experience of its Southern neighbour ？ which underwent rapid development not only in the economic but also in the financial sector ？ would be beneficial. Moreover, it is imperative to recognize such reform plans are conditional upon remedying the distrust towards the government and meeting the terms required to lift the sanctions against North Korea. 

Executive Summary

I. Background

II. Overview of Macroeconomic Environment, SME’s Financing and Financial Markets in APEC

1. Macroeconomic Overview
2. SMEs and SME Financing Policies
3. Financial Market Conditions in APEC
4. Financial Integration and SME Financing

III. SME Financing in EU

1. Characteristics of European SME Support Policy
2. SME Financing through Bank Loans and Capital Market
3. EIF for SME Financing Support
4. Lessons from the EU

IV. Policy Suggestions and Conclusion

1. The Necessity of Financial Support Policies for SMEs at the APEC level
2. Issues to be Discussed
3. Suggestions and the Way Forward

References

Appendix

Annex: List of Acronyms 

The recent downturn in the global economy is demanding new growth models from APEC members, and SMEs are expected to play a crucial role in raising productivity and in sustaining economic growth by facilitating technological advances, as well as in job creation. Given that SMEs have generally limited access to finance due to information asymmetries and the riskiness of their businesses, public support by government such as credit guarantee schemes (CGS) are a very important tool for supporting SMEs. SMEs at early stages of development (or startups) have risk profiles that favor equity financing or financing through the capital market.
For this to work, however, the large-scale financing is required. Therefore it will work best in a developed equity market such as that of the US. When the condition above does not hold, two alternatives are possible. The first option is to realize the large-scale funding in an inter-temporal way. This gives rise to the need for a policy lending program (or government credit) resembling a typical European-style policy financing scheme. Second option is to expand the financial market. For this to work, establishing universality of contracts through economic integration is necessary. Universality of contracts means equal protection of property rights for incoming foreigners who enter into contracts in the host country. In this case, capital inflow is also needed from countries outside the integrated economic bloc.
EIB (European Investment Bank) aims to implement the EU’s SME Initiative through its SME support programs. The European Investment Fund is responsible for allocating SME capital to stimulate the SME sector, on behalf of the EC. The experience of the EU points to the necessity of non-bank financing programme to add to bank financing for SMEs. Thus EIF is also shifting its focus from provision of early-stage guarantees to development of various capital market-based instruments for SMEs.
This study ends with suggestions for APEC regarding SME financing policies. First, PCGS (public credit guarantee system) is better in the very early stages of financial cooperation. Second, SME financing policy should include both CGS-style and market-based financing. Third, it is necessary to settle on a definition of SMEs based on unified criteria. Fourth, a PCGS-style support scheme is needed to develop within the APEC framework. Lastly, an equity market-based support system specialized for SMEs should be established. This report also suggests action plans to make an investment fund centered on SMEs.
 

 

This paper investigates the short-term and long run co-movement of key economic indicators in the South Asian countries: real GDP, exports, imports, openness, exchange rate. This paper performs Johansen’s co-integration test to detect long-term stochastic time trend and Vahid and Engle’s common feature test to examine the existence of short-run common cycles. The results show that the co-movement of the South Asian countries is very weak not only in the long run but also in the short run. Regional conflicts and low degree of intra-trade and intra-investment have led to weak co-movement in this region. Especially tensions between India and Pakistan make barriers in most areas, including trade and investment. The weak co-movement means that the economic integration of South Asia continues to be delayed and the spillover effect of the rise of the Indian economy will be limited. Therefore, it is suggested that both firms and the government have to make differentiated and specialized strategies and policies for each South Asian country.  

Preface

Contributors

Introduction and Overview

Part 1. Regional Integration in Northeast Asia: Status and Potential

A Northeast Asian Economic Community: A Korean Perspective
Chang Jae Lee

Introduction
Recent Trade Situations of China, Japan, and Korea
China-Japan-Korea FTA (CJK FTA)
Conclusion
References

A Northeast Asian Economic Community: A Chinese Perspective
Fu Jingyun

Evolution of China’s FTA and Regional Economic Integration Policies
Overview of China’s FTA Network
Characteristics of China’s FTA Policies
Prospects of China’s FTA Policies and Their Implications for the Region

A Northeast Asian Economic Community: A Japanese Perspective
Yasuo Tanabe

A Northeast Asian Economic Community
An Asian Energy Partnership
Japan-China Energy Conservation Forum
Conclusion

A Northeast Asian Economic Community: A Russian Perspective
Sergei Sevastianov

Introduction
Past and Present Russian Regional Policy in the Far East
Development of Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Russian View and Possible Role in NEA Integration
Subnational Models of Economic Cooperation in NEA
Conclusions and Recommendations:

Toward a Northeast Asia Economic Community: Lessons from the European Union (EU), Good and Bad
Glyn Ford

EU lessons for Northeast Asia

Potential for Connectivity in Northeast Asia: Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Dmitry Reutov

Energy Projects
Transportation Infrastructure
Conclusion

Part 2. Renewable Energy in Northeast Asia and Prospects for the Region

China Renewable Energy Development and Future Prospects for Cooperation
Shi Dinghuan

History and Mission of the China Renewable Energy Society
Renewable Energy in China
Prospects for Northeast Asia Cooperation

Status of Renewable Energy Development―Toward a Low Carbon Society
Yoshiki Iinuma

Hawaii’s Clean Energy Transformation
Mark Glick

Introduction
Renewable Energy and Energy Savings
Tackling Transportation
Reducing Energy Demand
Hawaii: A Clean Energy Test Bed

Part 3. Financial Cooperation in Northeast Asia

Financing the Asian Infrastructure Investment Bank (AIIB):
Issues for Further Discussion
S. Stanley Katz

Development Bank Objectives
AIIB Financial Arrangements and Parameters

Creating a Multilateral Development Fund for Financial Cooperation in Northeast Asia
Jai-Min Lee

Recent Developments Impacting the Northeast Asian Development Bank Proposal
Creation of NEA Fund
Role of the Greater Tumen Initiative (GTI)
Conclusion

Establishing a Northeast Asian New Financial Institution to Promote Regional Economic Cooperation and Development
Zou Lixing

Strategic Value of and Market Demand for a Northeast Asian New Financial Institution
The Relationship between a New Northeast Asian Financial Institution and
the Asian Infrastructure Investment Bank (AIIB)
Basis and Path to establish a New Northeast Asian Financial Institution

Financial Cooperation in Northeast Asia: Japan’s Perspective
Hideo Naito

The Potential of Northeast Asia
Recent Trends in Financial Cooperation in Northeast Asia
Partnership for Quality Infrastructure
Japan and NEA Potential
Public Private Partnership (PPP) Readiness in Asia-Pacific

The Belt and Road Initiative: Ambition and Reality of China’s “Go Global” Strategy
Liu Ming

Background of the Belt and Road Initiative
Belt and Road Initiative: Challenges
Conclusion

Appendix
 

The Northeast Asia Economic Forum (NEAEF) is a regional nongovernmental organization created in 1991 to sponsor and facilitate research, networking, and dialogue relevant to the economic and social development of Northeast Asia. The Forum is also committed to promoting understanding and relations among the peoples of Northeast Asia, North America, and Europe.
 The main objective is for NEAEF to conduct research and conference activities aimed at functional economic cooperation such as cross-border energy, transportation and logistics infrastructure development, and capital mobilization. The Forum holds annual conferences, workshops, and seminars for planning, facilitating, coordinating, and implementing international and interdisciplinary solutions to common policy problems. It is the only nongovernmental regional organization in which all the nations of Northeast Asia and the US are consistent and active participants.
 In collaboration with the Korea Institute for International Economic Policy (KIEP), in 2015 NEAEF carried out activities on building a Northeast Asian Economic Community based on lessons learned from NEAEF’s previous work on financing cross-border functional economic cooperation. For the first year of this collaborative project the focus was on regional cooperation and strategies in Northeast oriented toward North Korea―this work focused on functional economic cooperation in cross-border resources, energy supplies, infrastructure construction, capital mobilization, and institutional development.
 This volume is the first part in a series of proceedings titled Building a Northeast Asian Economic Community. It contains presentations and summaries from the NEAEF Beijing Special Meeting and the related activities that took place under this project. The aim of the project is to contribute to and encourage activities and efforts toward regional economic integration in Northeast Asia. 

 

As China emphasizes the role of service sectors in achieving medium-to-high level of economic development, and as the bilateral free trade agreement (FTA) between Korea and China comes into effect in December 2015, the Korean government and companies expect increased opportunities to enter the domestic service market of China. This study deems that the market-opening strategy for China’s service sectors has been changing during the 12th Five-year Plan period (2011 to 2015). Based on the results from the case study of the Shanghai Pilot Free Trade Zone (PFTZ), the study evaluates the level of market openness of China’s service sectors and provides suggestions for furthering Korea-China cooperation in the service sectors.
 The primary findings of this study can be summarized as follows. In Chapter 2, we analyze the current state of the Chinese service industry and major related policies, and explain why a change in the strategy for opening the markets for China’s service sectors is necessary. The importance of Chinese service sectors rose substantially during the 12th Five-year Plan period. The share of the tertiary industry in China’s GDP surpassed that of the secondary industry for the first time in 2012, and steadily increased to reach 48.1% of GDP by 2014. Since 2011, the share of the tertiary industry in China’s total workforce was first among the three industries; the same has been true of FDI since 2010. During the course of the 12th Five-Year Plan, the Chinese government has also announced for the first time a development plan that focuses on the service sector. In 2014, the Chinese government emphasized the role of service sectors in the “Made in China, 2025(中？制造 2025)” development plan and announced a policy that specializes in nurturing the producer service industry. But the service sector still needs to be opened further in order for China to gain a competitive edge in the global market.
 In Chapter 3, we evaluate the level of market openness in China’s service sector and analyze the changes in the market opening strategy, focusing on six industries in the service sector: finance, health, law, education, tourism, and culture. China’s service industries have opened up substantially after joining the WTO in 2001, but no significant change was made in the DDA initial offer, revised in 2005. Similar trends can be seen in finance and cultural industries; some areas in health, law, education and tourism, however, show a higher level of openness than corresponding markets in Korea. A comparison of the Service Trade Restrictiveness Index (STRI) in 2015 revealed that China still shows a lower level of openness in all 18 sectors when compared to other countries, and an overall higher level of restrictiveness than Korea.
 The Chinese government’s market-opening strategy for its service sectors has taken a different turn since 2011. First, the basic framework for market-opening for service sectors changed from stimulating influx of capital and technology by attracting foreign investments to driving forward structural reforms in the domestic economy and easing the country’s adaptation to global changes. Second, the target beneficiary group for the opening policy has expanded from foreign companies to China’s privately-owned companies. Third, the government is attempting to apply the development strategy of so-called “Points-Lines-Surfaces (点-？-面)” to open up specific industries in the service sector within a specific geographical area. Fourth, the government’s attitude has shifted from perceiving the opening process as an obligation mandated by the WTO, to active pursuit of opening procedures to prepare for the age of multilateral cooperation, epitomized by the TPP or the RCEP. Fifth, the government has been pursuing changes in the market-opening method, such as discontinuing incentives to foreign companies, adopting a negative list, and encouraging overseas expansion of Chinese domestic companies.
 In Chapter 4, we conduct an analysis using Shanghai PFTZ as the representative case of the market-opening strategy introduced in Chapter 3, and analyze the specific market-opening policies of six service industries that was implemented in the Shanghai PFTZ. As a result, we found out unconventional measures were generally avoided in Shanghai PFTZ until presently. In addition, the marketopening policy of legal service industry has not been effective enough, because openings as a result of the new policy were not as palpable as the foreign law firms expected; case in point, allowing the establishment of Sino-foreign joint ventures and employment of Chinese lawyers. In the health services, the establishment of wholly-foreign-owned medical institutions was allowed in 2013, but the market-opening policy has been discontinued recently. Shanghai PFTZ also seems to be very cautious in the opening of the cultural service market, allowing only the sales of video game consoles (which has low market share in the game industry) and the establishment of wholly-foreign-invested entertainment artist agencies to provide services in Shanghai.
Other cultural sectors such as film, broadcasting, and online games were excluded from market-opening. In the education service sector, it is encouraging that establishing both educational training institutions for profit and wholly-foreign-owned vocational skills training institutions were allowed, but under the new policy no company has established a presence in the Shanghai PFTZ till now. Financial service sector is not an exception, and most of the market-opening policies are, as of yet, merely an expanded version for areas that have already been opened.
 In Chapter 5, we discuss the implications for the Korean government and companies to expand cooperation with China in the service sectors. While the essence of Shanghai PFTZ’s is institutional reform rather than market openness, and while there certainly are limitations for local governments to enforce the market opening policy aggressively; it is the conservative attitude of the Chinese government regarding market-opening for service sectors constituting the primary reason why the market openness of service sectors in Shanghai PFTZ is delayed. The PFTZ project and market-opening policy may be expanded throughout China in the future, but the Chinese government will likely continue to be cautious regarding their pace and scope.
 The Korean government should utilize the market-opening policies of Shanghai PFTZ as well as collect information on ‘bottleneck’ problems which the Korean companies have experienced entering the service sectors in China during the course of post-FTA negotiations with China. The monitoring system also needs to be established to provide Korean service companies with guidance related to PFTZ policies. The opening of finance, law, housekeeping, and pension service markets might take place prior to all other service sectors, and Korea can cooperate with China in those sectors especially. Moreover, the Korean government should establish a mentoring system enabling Korean service companies to exchange experiences in the Chinese service market.
 With regard to Korean companies, we suggest that they use the Shanghai PFTZ as a platform and source of funding, to ask for exclusive benefits by appealing that they can provide advanced management knowhow to the Shanghai PFTZ, and use the simple incorporation procedure in Shanghai PFTZ. In addition, they should strengthen cooperation with privately-owned Chinese companies and carve out new service markets, while considering local demand. 

 

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.  

 

China, as one of the world’s leading economic powers, has been heavily dependent on investment and exports for economic growth since its opening and reform, which allowed for a sustained average annual growth rate of 10% until 2011. But the Chinese government, realizing the limits of such investment-driven growth model, has been pushing for a paradigm shift to a consumption-driven growth since the beginning of the 12th Five Year Plan (2011~2015). The switch is a demonstration of the government’s firm determination to lower its dependence on investment for economic growth and expand consumption, even at the cost of decreased growth rates. But since 2012, a sluggish global economy has led to a slowdown of exports, investments and consumption, causing China’s economic growth to dwindle to around 7% and thus, signaling the country’s entrance into the “era of new normal.”
Considering such a background, this research aims to investigate why consumption was not stimulated to the extent the Chinese government wanted, using an empirical analysis; it also seeks to evaluate China’s efforts to boost consumption, and, from them, its consumption-driven growth strategy. Finally, this study analyzes the impact of China’s consumption-oriented growth model on the Korean economy, presenting several suggestions for establishing Korea’s new China strategy in this “era of new normal.”
This paper is divided into six chapters. After the Introduction, Chapter 2 looks into Chinese government policies to boost consumption, which began in earnest after the Global Financial Crisis. Three main policies are especially emphasized: China’s strategy to decrease household saving rate, its strategy to increase household disposable income and its strategy to change the consumption structure.
In Chapter 3, this paper investigates the trend of China’s household consumption, its consumption gap across various strata, its consumption structure and the trend of the consumption market according to industry sectors. According to an index that reveals China’s consumption expenditure, China’s household consumption increased more than five-fold from around 4.7 trillion yuan in 2000 to around 24.15 trillion yuan in 2014. But income disparity, an unwelcome side effect of China’s high-speed growth, is widening the consumption gap between urban and rural areas, between classes, and between regions. China’s retail sales growth, which had been rising steadily rise since 2000, has slowed after 2010. Reasons for the slowdown include retreating consumer confidence due to the recent economic recession, general preference for savings due to insufficient social security net, etc.
In Chapter 4, widening income disparity, demographic changes, an inadequate social security system, low urbanization rate, slumping development of consumer finance and high housing prices are presented as the factors responsible for constraining the growth of China’s domestic consumption, and efforts were made to analyze the present condition of each factor. After 2009, urban-rural income gap narrowed to a certain degree, but disparity across regions (Eastern coastal regions versus Western inland regions) and the social stratum, visible in the Gini coefficient, remain large.
In Chapter 5, this paper uses province-level data to conduct an empirical analysis to examine factors that determine China’s domestic consumption. The results show that factors including economic growth, level of economic development, household income, investment, elderly support ratio, development of the service sector, financial development, urbanization, education expenditure, and the rise in the minimum wage all have meaningful influence on China’s domestic consumption.
Economic growth and economic development were found to have a meaningful negative correlation with consumption. Household income and development of the service sector were found to have a meaningful positive correlation to consumption; while investment and elderly support ratio had a meaningful negative correlation; this indicates that low labor share, underdevelopment of the service industry, high investment rate and high elderly support ratio have limited the growth of China’s household consumption.
Among the China-specific factors, financial development and urbanization were found to have a meaningful positive influence on household consumption.
Regarding government policies, the expansion of fiscal spending for education after the financial crisis has contributed to the increase in household consumption.
On the other hand, expenditure on medical, social security and subsidized housing did not have any meaningful influence on household consumption. Minimum wage increases have been found to have a meaningful positive influence on increasing household consumption in the coastal regions; in the coastal areas, the government policy of raising the minimum wage has been successful to some degree.
Regarding investment, investment on manufacturing and the real estate sectors have mostly increased profits of companies, rather than that of households, restricting the growth of household consumption. Investment on farming and the service sectors, on the other hand, led to a growth of household income and consumption.
As China’s growth paradigm shift is expected to greatly impact the Korean economy, this research proposes Korea’s new China strategy based on the above findings.
First, against the backdrop of China’s declining growth as a consequence of entering the “era of new normal,” Korea faces an urgent need to develop new markets.
Second, more than 80% of Korea’s investment in China has been concentrated in manufacturing and those directed to the service sector has been meager, meaning Korea must speed up its entry into China’s service market.
Third, as China’s consumption market is expected to continue growing, Korea should search for a new export strategy to China, with less emphasis on processing trade and more on expanding the consumer goods market. At the same time, Korea should increase its share of investment to target China's domestic markets, accelerating the change in its investment structure.
Fourth, Korea should establish a step-by-step strategy to target the Chinese market: while targeting general consumer goods in the early stage, Korea should ultimately take advantage of the Chinese government’s so-called “new form of urbanization” plan. At the same time, Korean companies and the Korean government should seek to actively participate in large scale infrastructure projects related to the “One Belt One Road” strategy. 

 

ASEAN is a key strategic market for Korean financial companies, as it represents a promising new source of sustained growth for an industry that is reaching the limits of growth in a saturated domestic market. For Korean companies to compete effectively with local financial compnies in ASEAN member states, it is crucial to have a deep understanding of ASEAN's financial industry, and furthermore to be aware of its current competitive landscape.
Recently ASEAN has begun earnestly to promote ASEAN financial integration with a view to enhancing the region's financial infrastructure and financial competitiveness. According to a commonly used concept of financial integration, a financial market is considered integrated if all market participants face a single set of rules, have equal access to the market, and are treated equally when engaged in it. More broadly, it indicates a state or a condition whereby connectivity among disparate financial markets increase beyond national borders. Thus, financial integration in ASEAN, literally, means integration of financial markets among the ASEAN member states, to stimulate economic growth and accelerate the process of forming an integrated community in the long run, through enhanced intra-regional investment (capital) and trade (goods and services).
Due to considerable differences in market size and the stage of financial development among the member states, establishing a single financial market in ASEAN might be an overly ambitious goal. However, the sustained economic growth of the region, and domestic financial companies’ vigorous efforts to expand overseas business and generate new sources of profits, makes ASEAN a highly strategic region. Thus we need to pay closer attention to the development of economies and financial markets in ASEAN.
The main objective of this study is to investigate current conditions and characteristics of ASEAN financial markets and the financial industry, particularly those of Singapore, Malaysia, Indonesia, and Thailand, and project future changes that may occur during the course of financial integration in ASEAN. These would help financial companies from Korea establish strategies to enter the Southeast Asian market. Since ASEAN is a strategic market for Korean financial companies with respect to continued growth and profit generation-especially when it is hard to find new opportunities within Korea-an understanding of financial markets of major ASEAN countries, including the current landscape of market competition, is critical for Korean companies to compete effectively in the region.
To this end, we must examine the historical and geographical characteristics of major ASEAN countries, as well as the current state of their economy, financial markets and financial industry. This article is structured as follows. Section II looks at ASEAN member states’ internal economic conditions (e.g. GDP, per capita GDP, economic growth, industrial structure) and external factors (e.g. trade volume and characteristics). Major macroeconomic indicators including exchange rates, policy rates, inflation, and unemployment rates are also examined. The analysis focuses on Singapore, Malaysia, Thailand, and Indonesia, and discrepancies among these countries are discussed. Additionally, the characteristics of the financial industry—specifically the banking sector and financial investment&# 8212;are examined. Also, given the significant importance of “Islamic finance” in the region, the topic is discussed separately in the Appendix.
Section III examines the current state of financial integration in ASEAN and draws implications for Korean companies. Different features of financial integration between ASEAN and the EU are highlighted, as well as impediments in ASEAN financial integration. Also discussed is the question of how the process of ASEAN financial integration affects regional financial markets and industries. Most ASEAN member states have bank-based financial markets, and have relatively less developed capital markets. Meanwhile, ASEAN-based banks are small in asset size compared to their European counterparts. In addition to this gap with advanced countries, there is a wide discrepancy across ASEAN as well. And there is diversity and divergence among policy measures adopted by individual ASEAN member states to strengthen their banking industry: Some emphasize overseas forays to pursue more M&A deals (e.g. Malaysia, Singapore, Thailand), while others focus on strengthening the domestic banking sector (e.g. Indonesia, the Philippines).
Meanwhile, the gap is even wider among capital markets than banks across the ASEAN region. Singapore has become a financial hub of Asia with a highly advanced financial sector, and Malaysia and Thailand have nurtured well-developed capital markets over the years. Capital markets in Indonesia and the Philippines are growing steadily, while those in the BCLMV (Brunei, Cambodia, Laos, Myanmar, and Vietnam) are still in an embryonic stage, with acute needs to build financial infrastructure and regulatory frameworks.
In this regard, a two-step approach has been made for ASEAN financial integration. The first is a “Two Speed” strategy to achieve partial integration first among the ASEAN 5 countries, and then gradually close the gap with the BCLMV, to eventually achieve full integration. The second is a “Two Track” strategy to allow QABs (Qualified ASEAN Bank) free entry into the ASEAN market, and later examine whether to grant the same privilege to non-QABs. At this point, ASEAN envisions a partial financial integration—unlike the EU—in the banking sector by the year 2020. As this endeavor moves forward, ASEAN member states will lower entry barriers in financial markets, and financial companies from many countries would continue to enter the market, thus strengthening their competitiveness and diversifying sources of profit.
From the current condition of the ASEAN financial industry, we can draw several implications for domestic financial institutions, especially as they are making great efforts to penetrate overseas markets, faced with deteriorating profitability within the country.
Section IV investigates how the progress of ASEAN financial integration and subsequent changes in the financial market environment have affected business strategies of financial companies in the region. Based on this analysis, we try to seek an effective strategy for domestic financial companies operating in the region. Specifically, we analyze the strengths of major ASEAN-based financial companies and their peculiar business practices in the ASEAN region. Then we look at business operations of Korean financial companies in ASEAN, including notable characteristics and obstacles.
By analyzing some of the leading Southeast Asian financial companies&# 8212;CIMB (Malaysia), Maybank (Malaysia), DBS (Singapore), OCBC (Singapore), and Mandiri (Indonesia)—we draw implications for penetration of overseas markets. It is observed that only a handful of financial companies from advanced ASEAN countries like Singapore and Malaysia have a wide presence in the region, and their presence is heavily biased in major ASEAN states including Malaysia, Indonesia, and Thailand, while level of penetration in the BCLMV markets remains weak.
Financial industry in ASEAN shows several salient features. First, ASEAN-based banks are more competent than non-ASEAN-based banks in the region, while global companies are more competent when it comes to securities and asset management. It is because development of capital markets has been slower than banking markets in ASEAN. As a result, financial market growth has been driven by commercial banks, and many of the financial companies with operating in ASEAN are commercial banks that focus on retail banking. Second, Singaporean and Malaysian banks, with their large asset sizes and competitive edge, are focusing on penetrating overseas markets to diversify profit sources, and in the meantime, global financial companies have been increasing their presence and competing in these countries. Third, financial companies in ASEAN are shifting their strategy, from specialization in a particular business to diversifying business areas.
Meanwhile, several characteristics have been observed regarding Korean financial industry’s forays into ASEAN markets. First, the number of overseas branches has been growing since the global financial crisis. Second, these overseas branches saw their current net income improve in recent years, as well as localization indicators. Third, cases of M&A deals with ASEAN banks or equity acquisition have been increasing. KEB Hana Bank acquired PT Bank Bintang Manunggal in 2007 to conduct retail banking in Indonesia, and Woori Bank acquired Bank Saudara— which specializes in retail banking—to expand the business network throughout Indonesia.
As for Korean financial companies’ efforts to achieve greater penetration of the ASEAN market, several observations were made. First, they have been biased toward the BCLMV states, with many companies concentrated in similar business areas, thereby intensifying competition. Second, Korean business activities in ASEAN are heavily dependent on Korean companies and Koreans in the region. Third, overseas branches are mostly small in size, and lastly, due to limited information on local financial markets, Korean financial companies in ASEAN are exposed to uncertainty surrounding economic and financial fundamentals of ASEAN member states.
In light of these findings, we would like to propose several strategies for forays made by Korean financial companies into the ASEAN market. First, a strategy of localization would be suitable for banks, while investment companies need to focus on establishing a “global link,” given that banks try to expand overseas business operations to attract new consumers and enhance profitability, while investment companies need to strengthen global networks to secure funding and manage assets more efficiently. Second, Singapore would be an ideal location to foster wholesale banking, while other member states are more suitable for retail banking. In retail banking, localization is key to increasing market share, and thus, acquiring good-sized local banks e would be essential. In comparison, in wholesale banking, the key is location where sufficient funds can be secured at low costs. Thus, overseas branches need to be established in financial hubs like Hong Kong and Singapore, or places where Korean companies are doing brisk business. Focusing on wholesale banking could be even more effective through partnership with investment companies.
The development of financial markets and financial industry in ASEAN member states shows that while stock and bond markets are developed to an extent in Malaysia and Indonesia, money markets and derivatives markets are at a nascent stage. In other countries, these markets are mostly absent. Under these circumstances, financial companies in Malaysia and Indonesia are capable of providing brokerage services and playing the role of market maker in traditional stock and bond markets, but their capacity for prop trading or hedge fund investment is quite limited. Also, market-making is difficult in corporate bonds market due to its negligible volume. However, the market for corporate financing and principal investment could be tapped into, as transfer of ownership claims is established for corporations and securities, and depository and lending institutions (e.g. banks) are relatively well-developed. Asset management may be done for stocks and bonds, and possibly for real estates as well, as transfer of property ownership is permitted. However, investment needs remain weak in Indonesia and the BCLMV due to high deposit rates and relatively high level of price instability, and thus, it will be difficult to sell funds or other financial instruments in these regions. The BCLMV countries have weak financial infrastructure, which makes conducting brokerage services, market making, or prop trading difficult challenges. However, as progress is made in ASEAN financial integration, financial infrastructure in the region would continue to improve; and with a basic legal framework put in place that governs corporate financing, and transfer of company or property ownership, there would be more room for expansion of corporate financing and asset management in the region.
Lastly, other suggestions to reap more benefits from deepening financial integration in ASEAN would be to operate an educational program to train local financial experts, train and recruit ASEAN students studying in Korea, provision of greater government support for domestic financial companies to strengthen their networks in ASEAN, establishment of an early warning system to detect risks in ASEAN, and provision of timely information regarding changes in laws and regulations of the ASEAN member states. 

 

This study evaluates Korea’s competitiveness in manufacturing exports, focusing on the rivalry among Korea, China, and Japan. In doing so, it aims to predict changes in competitive dynamics for Korea in the global manufacturing market.
Chapter 2 compares the total factor productivity (TFP) and technical efficiency of 11 manufacturing sectors among the three countries. For Korea, firm-level TFP growth is decomposed by its determinants: within-firm and between-firm effects, entry and exit effects, technological progress and economies of scale. Chapter 3 sheds light on Korean export competition with China and Japan using various indicators calculated from export statistics. Then, it identifies the relationship between productivity and export performance in Korea. The standard gravity model and panel vector autoregressive model (VAR) are employed for estimations. Chapter 4 predicts changes in the competitive landscape for the Korean manufacturing industries based on long-term projections for productivity in the three countries.
The findings from the study are as follows: first, there has been a dramatic catch-up of China with Korea in terms of productivity, especially since 2000, while there still exists a relatively large gap between Japan and Korea. It is reminiscent of the sandwich theory, meaning Korea is literally sandwiched between a fast-growing China and technologically-advanced Japan. Second, since 2000, industry-level productivity has increased mostly with respect to the ratio of value-added in productive firms to total value-added in Korea. Meanwhile, it is actually technological progress that has been the major contributing factor to productivity growth rather than economies of scale. Third, Korea competes with China and Japan, respectively, in different product markets. It implies that the rivalry among the three countries even within the same industry may be divided in terms of the products. Fourth, productivity may be interconnected with exports in Korea. In particular, there seems to be a positive link between productivity growth created by technological progress and export performance. Fifth, current trends in productivity growth suggest that Korea will be overtaken by China in most manufacturing sectors except chemical and oil refining within 10∼15 years. For the long-term though, the productivity rankings will be reversed among Korea, China, and Japan; in virtually all industries but transportation equipment.