Will South Korea sprint forward by loosening up?

South Korea will loosen regulations in the financial industry to aid in the development of capital markets in Asia's third-largest economy, Finance Minister Kwon Okyu said. In July 2006, authorities said they planned to allow securities companies to trade bond futures as part of its program to ease regulations and grant firms space to expand operations. In August last year, the government made known plans to allow overseas holding companies to be listed on local bourses.

The plan to ease regulations requires approval from South Korea’s parliament, Kwon said. The measures may encourage financial industry competition and also help attract investors to the nation's stock market, which is valued at $925 billion and has fell to sixth-largest in the Asia-Pacific region from fourth spot last year. “Once the bill is passed, obstacles that blocked competition among industries and regulations that limited the development of new and creative products will be eliminated,” Kwon said.

In a bid to loosen up, the government will consider permitting the flow of hedge funds into South Korea, he said. Hedge funds may provide new “opportunities for investors” and “promote the development of financial techniques, thereby upgrading Korea's financial markets to the next level.” However, hedge funds may also bring about an increase in market volatility as they pursue short-term profits and take advantage of fragile underdeveloped markets.

Many say Korea is still lagging behind because it failed to break down these financial barriers a generation ago when the west was doing so. Would the move of easing regulations be enough to thrust South Korea forward as an equal competitor in the area of capital markets? With plans for allowing the entry of hedge funds in the pipeline, would South Korea see a surge in investment or make matters worse by creating instability?