Exodus?

Goldman, HSBC scaling back operations here

The government’s move to turn Seoul into an Asia financial hub is going adrift as a growing number of foreign financial firms are moving to either pull out of Korea or scale back their operations here.

Foreign players are suffering from poor business performances trigged by growing competition here and the prolonged global financial crisis abroad. Lack of transparency is also considered an important factor that is driving them out of the country.

U.S. investment banking giant Goldman Sachs said last month it will shut down its Korean asset management unit because it suffered from tens of billions won of net losses over the last five years. It posted a net loss of 7.3 billion won during the 2011 fiscal year which ended in March, following a deficit of 7.4 billion won the previous year.

Dutch financial group ING is currently in talks with KB Financial Group to sell its local life insurance unit to the nation’s second-largest financial group with a price tag of about 2.45 trillion won ($2.26 billion). Sources say a deal is just around the corner as KB’s boardroom is expected to approve the acquisition in a meeting scheduled for Wednesday.

U.K. banking heavyweight HSBC said it is considering all options for its retail banking unit in Korea. Government sources said last week that the British banking group is seeking to close its 11 retail banking branches in the country after failing to sell them to KDB Financial Group earlier this year.

Korea’s policymakers and financial market experts are split over why these firms are packing their bags.

The government says that foreign financial companies are trying to leave due to problems back at their headquarters, not because of Korea-specific troubles.

“The recent business pull-out has been sparked by their own problems stemming from the European debt crisis and the global financial crisis,” said Lee Byeong-rae, chief spokesman of the Financial Services Commission (FSC), the nation’s financial regulator.

However, analysts say that what’s behind the move are unfavorable business environments, such as complex regulations and heavy tax burdens, stressing that Korea needs to make all-out efforts to make the city more attractive to foreign firms.

Korea imposes a 22 percent corporate tax rate on foreign companies for revenue of more than 20 billion won per year, the same as for local counterparts. It is much higher than those in Hong Kong and Singapore, which levy 16.5 percent and 17 percent respectively.

Some experts say that the global financial crisis has changed the landscape for the global business environment, which has made Seoul’s financial hub vision look less plausible. They point out that the city needs to focus on its strengths.

“I don’t think Seoul has the legal environment, the critical mass or the scale to become a major financial hub. It will always be smaller than Singapore or Hong Kong, or than Tokyo, for that matter. And you also have Shanghai, aspiring to become a major hub as well,” said Mauro F. Guillen, a professor at the Wharton School at the University of Pennsylvania stated in an email interview with The Korea Times.

“Having said that, what I think can be done is develop some specialization. Seoul could become a hub for technology investing or for infrastructure, but not overall, across all areas of finance.”

Korea’s financial hub dream dates back nine years when the Roh Moo-hyun government set up a three-step strategy titled “Northeast Asia Financial Hub” in December 2003. According to the plan, it aims to grow as one of three major financial hubs in the region along with Hong Kong and Singapore by 2020.

The FSC predicts that Seoul could be one of three financial axes in Asia in three years where more than 20 biggest global asset management companies will open offices. It also expects that Korean private equity funds will lead Northeast Asian restructuring markets, including China.

There is another sign that Korea’s financial hub vision is losing its luster. Empty office space at the International Finance Center in the capital illustrates fading hopes. The Seoul Metropolitan Government and AIG Korean Real Estate Development, a subsidiary of American International Group, recently opened the center consisting of three office buildings, a big shopping mall and a luxury hotel in Yeouido.

The municipal government sought to make it a landmark building for foreign financial companies but less than 10 percent of foreign financial companies reside there.

Some say that the financial hub plan was wrong initially because what the country needs is to enforce its manufacturing sector, not the financial segment. Chang Ha-joon, a renowned economist from Cambridge University, leads the debate as he has criticized the Korean government for the financial hub project, which he believes could blow up the whole economy.

“President Lee Myung-bak followed wrong directions, such as the Korea-U.S. free trade agreement and financial hub, which President Roh Moo-hyun set up,” Chang said in a forum hosted by Sogang University in September.

“Korea was lucky because the global financial crisis hit the country before it has become a financial hub. At the time, Korea was benchmarking Ireland, Iceland and Dubai.”

It means that should the financial crisis come late and Korea had loose financial regulations like Ireland, the country’s economy would have collapsed. All of the three countries suffered greatly from the global crisis in 2008. <The Korea Times/Kim Jae-won>