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PARK Jae-Ryong

Property Market and Foreign Investment

PARK Jae-Ryong

June 16, 2005

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There's a growing consensus that Korea should take a more careful view of foreign investment. Such perception became more pronounced after acquisition by foreign investors of Korea First Bank and Korea Exchange Bank in the aftermath of the 1997 economic crisis. Some commentators insist Korea should keep a sharp eye on the inflow of short-term speculative funds.

That economic crisis did shake us up. Companies big and small went down one after another, kicking tens of thousands of people out of their jobs. With the country's foreign exchange coffer fast running empty, our grandmothers and mothers surrendered their gold rings to replenish our state treasury. Nationwide campaigns got underway to revitalize the shattered economy.

Thanks to painful restructuring that followed, Korea 's foreign exchange reserves now top US$200 billion, the largest amount in Korea 's history. It now makes people nervously asking if this is not an excessive amount. A large inflow of foreign capital undoubtedly contributed to this increase in foreign reserves, allowing foreign investors to acquire Korean companies or build factories.

While we remain grateful to them for rescuing our economy, they should not be mistaken for Santa Claus. Foreign investment looks for profit, not charity work. This is not to deny foreign capital's role in helping Korea 's economy or its industrial development. Nor should we object to the necessity of attracting foreign capital. What I am suggesting is that we should be more selective in attracting foreign investors on the basis of qualitative and quantitative contribution it can make to our economy. Speculative investment won't help our economy.

Consider the case of property market. Like other sectors of the economy, the real estate market was flung open after the 1997 financial crisis. In the process of restructuring in the depth of this crisis, Korean companies had to sell off their real estates in order to survive, often with encouragement of government supporting this with injection of public fund. In the course of this stampede for foreign investment - some critics called it a fire-sale - some big-name securities firms on Yoido section of Seoul, the city's financial district, went to foreign ownership.

Foreign investors also acquired prime real estates including some well known skyscrapers. At the end of 2004, foreign investors owned 47.72 million pyong of land in Korea (one pyong equals 3.3 square meters), an equivalent of 26% of the size of Seoul or 18.6-times the size of Yoido district.

Some of these investments provoked outcries of unfair takeovers. And on closer look at deals involving some of these sales, one may get the impression that such outcries are not totally groundless. One large building in Gangnam sold to a foreign investor for around 600 billion Won, was later resold for 860 billion Won to another company.

In this deal, an enormous capital gain of about 260 billion Won was realized in a very short time. But equally astonishing was the fact that this capital gain did not lead to paying taxes as the investor in question was exempted from taxation under an international treaty covering double taxation. Some foreign investors defend this practice saying it was "tax avoidance," not "tax evasion." And such a deal is not illegal under the current international arrangement, they insist.

Something is clearly wrong with that kind of argument. Korea looks too accommodating to foreign investors justifying tax avoidance in the name of legal loopholes. The notion of tax haven for foreign investors needs to be tightened up to prevent any more such deals wreaking havoc on Korea's property market. This, of course, is not to argue in favor of blocking foreign investment. Nor has this anything to do with assertion of nationalism. The main issue here involves attracting quality foreign capital, not speculative fund looking for windfall gains.

I's difficult to change international taxation treaty in a short time, so a more desirable course is to examine the quality of incoming foreign capital more carefully, especially when investors buy properties. This won't be easy. And it can't be done overnight. But in order to ensure a better development of Korea's property market, it must try harder to attract foreign capital that is healthy and wholesome, not speculative money looking for a quick windfall gain.

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