Legislation paving way for Korean offshore move
South Korea's Ministry of Finance and Economy and Ministry of Planning and Budget are preparing a draft law for the National Assembly that would let approximately 100 government-sponsored asset pools invest in domestic stocks and international securities.
Among those affected is the Korea Credit Guarantee Fund, which has W4 trillion ($3.1 billion) of assets under management - all invested in domestic fixed income, mainly government bonds.
Gwak Sung-chul, deputy director for international affairs at KCGF, says the two ministries are keen to prod these myriad of funds to diversify into what Koreans consider "risky assets" - equities and offshore securities.
The law change would apply to "financial funds" such as KCGF and a host of other asset pools. They vary in size, but Gwak says that together their asset size now equals the government budget. "That's why the Ministry of Planning and Budget wants to change the law," he explains. "Our fund sizes are too big."
KCGF is only mid-sized. Some funds are tiny but others include monsters like the W51 trillion ($50 billion) National Housing Fund or the W20 trillion National Credit Union Federation of Korea.
The government is also keen to consolidate these pools, although it is meeting stiff resistance from jealous bureaucrats. "The government would like to consolidate these into a few big funds it can control," Gwak says.
Despite the government's move to liberalize these funds' investment rules, the bureaucrats running these funds are not prepared to make any sudden changes. They are supported by the government - the law requires commercial banks to direct a percentage of their lending to the KCGF, for example - and these institutions have been able to earn 5% to 6% annually on their investments. The government has been building the domestic bond market since the 1998 financial crisis, so some managers believe they do not need to change.
But others like Gwak believe at some point these government-supported institutions must diversify. "Society is globalizing and we may need to diversify our investment," he says. Some institutions such as the KCGF are experimenting with new asset classes that are already permitted, such as domestic private equity. But moving offshore will be a gradual process. "We may not plan to invest offshore," Gwak says. "It depends on our management's attitude."