The Wall Street Journal-20080114-Politics -amp- Economics- Koreans Show Ambivalence In Treatment of Investors
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Politics & Economics: Koreans Show Ambivalence In Treatment of Investors
SEOUL, South Korea -- A travel ban on a U.S. hedge-fund chief highlights the risks of doing business here even as the president- elect seeks to attract more foreign investors.
John Grayken, chairman of Texas's Lone Star Funds, arrived in South Korea last week to testify in a case concerning alleged irregularities in Lone Star's ownership of Korea Exchange Bank. After his arrival, authorities banned him from leaving South Korea for 10 days. Today he will face questioning over the conditions that led Lone Star to buy KEB.
Such treatment of foreign investors presents a public-relations challenge for President-elect Lee Myung-bak, who takes office Feb. 25. He won election last month by emphasizing economic growth and said he would attract more foreign investment to spur the economy.
Mr. Lee will send envoys to top trading partners next week to signal South Korea's openness. He also appointed a British bank executive, David Eldon, to his transition committee and a government panel on national competitiveness.
Mr. Eldon said last week that he hopes Koreans will change their views on the profits that foreign investors make from their dealings in South Korea. "This has to be all part of the global business scene that I think Korea wants to be a part," he said.
But South Koreans are wary when foreign investment leads to control of Korean companies by outsiders. That wariness has turned to anger in cases when the foreign investor sold, or tried to sell, the Korean asset for a profit. Some politicians and media portray this as an economic version of the military invasions the Korean peninsula experienced repeatedly over the centuries.
Investors may be turning more skittish about South Korea because of the atmosphere. Foreign direct investment in South Korea has declined modestly each year since a peak of $12.7 billion in 2004 and last year was $10.5 billion, according to a preliminary government estimate. However, it is difficult to be certain of the cause of the decline, particularly because China is competing for with South Korea for foreign investment capital.
In Mr. Grayken's case, suspicions arose after Lone Star bought control of KEB in 2003 for $1.3 billion. In 2006, Lone Star tried to sell KEB to Kookmin Bank, South Korea's largest by assets, for a price that would have netted a $4 billion profit.
Had the deal gone through, Lone Star would have been the third foreign investment fund to make big money from buying a distressed Korean bank early this decade, and then restructuring it and selling. The proposed sale created a political uproar, leading to investigations and charges against former government officials and executives at KEB for letting the bank be sold to Lone Star at too low a price in 2003. Lone Star and Kookmin postponed the deal for months as the investigations wore on.
Beyond the inconvenience of his travel ban, Mr. Grayken is keen to get the case out of the way for business reasons. Lone Star terminated the deal with Kookmin early last year, saying KEB had become more valuable since the original pact.
In September, Lone Star announced a tentative agreement to sell a controlling stake in KEB to HSBC, the London-based multinational bank, which has a small presence in South Korea. If this deal goes through, Lone Star would make about $5 billion from its ownership of KEB.
Mr. Lee, the president-elect, hasn't commented on specific investment cases. But in an interview last year, he said: "I think Koreans sometimes, instead of focusing on what a law says, focus on a moral stand or emotion. When international investors look at that, it's controversial."
