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South Korea may allow hedge funds to diversify market

South Korea will consider allowing hedge funds to operate as it strives to upgrade the economy amid competition from foreign manufacturers, the finance minister said yesterday.

Kwon O-kyu told a forum the government would step up efforts to revitalize the asset management industry through diversified sales channels for funds and deregulation.

"Once a solid foundation is laid for asset management after the Capital Markets Consolidation Act takes effect, we will consider plans for allowing hedge funds," he told a conference in Seoul.

He said that the government would send a related bill to parliament for approval next month.

"Some point to the side effects of hedge funds, such as increasing financial market uncertainties by pursuing excessive short-term profits and herding to take advantage of fragile, underdeveloped markets," Kwon said.

"Nevertheless, hedge funds can also be used to provide new investment opportunities to investors and to promote the development of financial techniques, thereby upgrading Korea's financial markets to the next level," he said.

Kwon also promised to ease procedures for foreign companies to list on the domestic bourse.

He said the economy should shift to "high value-added innovative" industries to overcome internal and external challenges.

Manufacturing faced fierce competition from advanced nations and China and other "low-wage emerging economies" were catching up quickly.

"In order to make such an economic paradigm shift possible, fundamental changes are necessary to the financial system that facilitate the flow of capital in the economy," Kwon said.

South Korea's equity funds surged to 46.5 trillion won (US$50.3 billion) at the end of last year from 8.6 trillion won in 2004.

But 77 percent of household assets remain concentrated in the real estate sector, while investment in stocks and bonds is still low, he said.
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