Market Analysis of Korea

Country Statistics

  • Population: 48.2 million
  • Total area: 99,678 sq km
  • Capital: Seoul
  • Major language(s): Korean
  • Time zone: GMT + 9 hours
  • Currency: Won (KRW)
  • Central bank: Bank of Korea (BOK)
  • GDP: US$1,352.5bn (2009 est); -1.0% real growth rate (2009 est); 27,791 per capita (2009 est).
  • Inflation rate (consumer prices): 2.6%
  • Trade exports freight on board (fob) US$373.2bn (2009); imports cost, insurance and freight (cif) US$323.1bn (2009).
  • Major exports: electrical machinery and equipment; ships and boats; energy equipment and energy-related machinery; vehicles, parts and accessories; optical, photographic and measuring equipment, parts and accessories; and other commodities (2009).
  • Major imports: mineral fuels, mineral oils, and products; electrical machinery and equipment; energy equipment and energy-related machinery; iron and steel; optical, photographic, and measuring equipment, parts and accessories; and other commodities (2009).
  • Major markets (% of total): China – 23.2%; US – 10.1%; Japan – 5.8%; Hong Kong – 5.3% (2008).
  • Major suppliers (% of total): China – 16.8%; Japan – 15.3%; US – 9.0%; Saudi Arabia – 6.1%; United Arab Emirates (UAE) – 2.9%; Australia – 4.6% (2008).
  • Total trade: US$696.3bn (2009); total trade with Asia US$355.6bn (2009).

Banking System and Bank Accounts

The central bank is the BOK. The Financial Supervisory Service (FSS) regulates the banking sector.

Since the 1997 Asian financial crisis, there has been consolidation in Korea’s banking industry. At the instigation of the government, many major domestic banks merged to improve their financial health. Notable examples are Citibank’s merger with Korea First Bank and Standard Chartered’s merger with Hanmi bank. The crisis also brought tighter regulations in the banking industry, particularly in the way financial transactions were conducted among businesses.

At present, there are around 15 domestic banks, the largest of which dominate the local market, while foreign banks have been more successful in tapping offshore business.

Documentation requirements for opening bank accounts are not particularly onerous and include standard items such as certificates of business registration, etc.

Figure 1: Types of Bank Accounts Currently Available

Source: HSBC

Clearing Systems and Payment Instruments

High-value clearing system (BOK-Wire)

The BOK Financial Wire Network (BOK-Wire) is an online network that connects the central bank and participating financial institutions for real-time gross settlement (RTGS) across current accounts held with BOK. The cut-off time is 3:00pm.

Local foreign currency clearing system

There are two kinds of local foreign currency clearing system in Korea. One is a clearing system provided by Korea Exchange Bank, Kookmin Bank and Shinhan Bank through their continuous linked settlement (CLS) memberships using SWIFT network. The cut-off time is 3:00pm for US dollars and euros, and 9:50am for Asian currencies.

The other uses Korea Financial Telecommunications and Clearings Institute (KFTC) – a non-profit clearing and financial data relay centre established and jointly owned by member banks – infrastructure instead of SWIFT network. On 22nd October 2010, KFTC started a real-time foreign exchange payment service, which is similar to the local currency payment system using KFTC infrastructure. As settlement banks, Kookmin, Shinhan, Woori, and Korea Exchange Bank act as settlement banks. The cut-off time is 4:30 pm.

Retail payment clearing system

The retail payment systems comprise the cheque clearing system, the bank giro system, the Online Funds Transfer (OFT) system, the Electronic Financial Information Network (EFIN) system, the interbank cash dispenser/automated teller machine (CD/ATM) system, the electronic fund transfer at the point of sale (EFTPOS) system, and the Cash Management Service (CMS) system. All these payment systems are managed by the KFTC. The cut-off time is 4:00pm for the OFT system, and 11:00pm for the EFIN and CD/ATM systems.

Legal, Company and Regulatory

In addition to BOK, the Ministry of Strategy and Finance is responsible for formulating rules and regulations relating to the banking and finance sector and the economy as a whole.

When foreign investors wish to set up a subsidiary in Korea by acquiring newly issued/outstanding stock of a company, they must submit the required declaration form through a foreign exchange (FX)-designated bank and take the necessary procedures for capital injection advised by the bank. The minimum level of injection for foreign direct investment companies is KRW50m.

Branches of foreign corporations must designate a FX bank through which to channel working capital, and repatriate the branch’s retained earnings so that the overseas head office can manage its money.

Liquidity, Currency and Tax

Transactions between resident and non-resident accounts and cross-border payment transfers are highly regulated under Foreign Exchange Transaction Regulation (FETR). To comply with the FETR, it is necessary to submit any underlying documents to the designated FX bank for the transaction. However, there is no restriction or limit regarding exchange into KRW or other foreign currencies.

FX regulations on non-resident accounts in local currency are as follows:

Non-resident free won account
  • Deposits from overseas and repatriation of funds out of Korea are allowed without restriction.
  • Local payments/collections are generally not allowed except for the transactions permitted by local FX regulations (e.g. a result of normal trading activities).
Non-resident won account
  • Local deposit and withdrawal are allowed without restrictions.
  • No repatriation of funds out of Korea from this account is allowed, except for the transactions permitted by local FX regulations.

Cash concentration and notional pooling between resident and non-resident is allowed up to US$30m for inter-companies under FETR, but BOK approval is required. Cash concentration means inter-company lending, hence a tax implication issue arises. HSBC SEL could provide single currency cash concentration between residents and between residents and non-residents. In case of cash concentration, a withholding tax on interest arising from inter-company lending is levied on the borrowing company.

Corporate customers should be aware of their planning of liquidity management, as the cash concentration between residents and non-residents is permitted up to US$30m (no limit between residents). The tax implication for intercompany lending should be applied in this case. A fair market interest rate should apply to inter-company lending. Currently the rate is 8.5% or the weighted average borrowing rate of the lender. Withholding tax on the interest arising from inter-company lending between residents is 25%. Currently the withholding tax on interest income for corporate customers is 14%.

The withholding tax rate for non-residents varies, and depends on international tax treaties where they exist.

Market Watch

The government is continuing its policy of gradual deregulation, as witnessed by legislation, such as the Financial Investment Services and Capital Market Act promulgated in 2007, and the government’s intention to raise the shareholding cap on non-financial company ownership of banks.

To learn more about HSBC Global Transaction Banking, please visit the company’sgtnews microsite.

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