Foreign investment interest in Korea has all but evaporated, and your international reputation for rule of law has been made a joke by your continued legal harassment of Lone Star Funds? Trying to convince foreign investors with the Big Lie that everything’s okay, and Korea welcomes foreign capital to its “level playing field”?

Although I am sure this will get me in trouble with Korea Law Blog reader H. Chang, I’ve got just the ticket for the Korean government: Even though you’ve lost your attempt to pin criminal liability on the foreign capitalists where no crime occurred (at least one of the Lone Star-related cases), and can’t sandbag anymore on the sale of Korea Exchange Bank to HSBC, go ahead and resuscitate past (failed) attempts to characterize Lone Star Korea as a permanent establishment of Lone Star Funds in the U.S.

That way, you can be seen to be attempting to ignore principles of law to “inevitably” seize US$1.2 billion dollars from a foreign investor you’ve tormented and unnecessarily demonized for years, just as the whole sorry affair was fading into the rear-view mirror!

While you’re at it, be sure to declare that foreign capital won’t be welcome, because of “negative public sentiment” when you privatize state-owned companies. That’s sure to help—if what you want is to chase away foreign investors.

Anyway, because of this buccaneering spirit, the prospect of working as a foreign lawyer in Pyongyang has been on my list since I’ve been a lawyer.

Michael Hay, a foreign legal consultant in Seoul since 1990, actually did this—striking out from “Big Four” firm Bae Kim & Lee in 2001 to focus on being a full-time North Korea consultant. He established KoreaStrategic Inc. as a consultancy (its domain lapsed in June 2006, though), then with a splash announced the formation of Hay, Kalb & Associates as the first foreign/North Korean joint venture law firm in Pyongyang. The Hay, Kalb website, too, disappeared sometime in 2005, and I lost touch with Mike Hay around the same time. I remain curious to know about his adventure up North; I’m sure it’s been fascinating. However, he was always extremely tight-lipped about what he was doing there. Other than that he was focusing on North Korea “full-time, all the time” it was hard to get any specifics out of him.

There are two other law firms advertising their services and office presence in North Korea: Italy’s Birindelli e Associati (now Chiomenti after being acquired) and Singapore’s Kelvin Chia Partnership. 

But today I found that the International Financial Law Review’s IFLR Legalwire, to which I hadn’t previously subscribed, recently (May 2008) reported on Birindelli partner Sara Marchetta’s experiences in Pyongyang. It’s fascinating stuff, published in two parts—go read Part 1 and Part 2. The article gave the impression that Hay, Kalb was still trading, which is promising, but Marchetta says that Birindelli kept no expatriate lawyer there year-round, because there were only four or five clients a year needing legal services, mostly in resource-extraction and processing ventures.

That’s a pretty discouraging level of business; I hope the rent for those offices in Pyongyang is inexpensive. No wonder there’s no McDonald’s in Pyongyang yet! Looks like it may be Singapore for me just yet.

Formation of a contract requires only that the terms and conditions of agreement between the parties be mutually understood. If both parties read and understand Russian well enough to know what they’re agreeing, then Russian is a language suitable for making a contract.

It seems that in other Asian countries there may be some regulation or local rule (maybe a municipal regulation in some Chinese cities, I really couldn’t say), and that foreign businesspeople are inspired by their experiences elsewhere. Or it could be that crafty locals like to tell credulous foreigners that It’s The Law™ to make the contract in Korean, so that the locals retain control of things through the opacity of their language, which is—to put it mildly—as much a world language as Norwegian, or perhaps Faeroese.

But because there’s no official-language requirement for contracts in Korea, you’re free as a bird to transact in English. In fact, English is a better language for contracting, since its vocabulary is so rich and lends itself to clarity.

(That said, it’s important to remember that for virtually all of the Koreans with whom you’re doing business, English is their second language, one which is of little daily utility, and therefore they’re also working at a disadvantage when transaction with you in English.)

In this regard, I am reminded of recent events in the neverending US beef import protests, whereby Amnesty International inspectors here to investigate allegations of police brutality against protestors (it’s interesting how there are no investigations when it’s the other way around) were hoodwinked by their lying, manipulative local staff who prepared false English-language translations of local-language materials for release to the world. (Remember, for leftists it’s not so much about the truth, but about the Truthiness. Fake but accurate is okay with them.) There is a lesson here for foreign businesses.

The Korean Amnesty staff were working to accomplish a goal: Gaining sympathy for their cause from the “court of international opinion.” The language of that court is English—if materials are in the Korean language, the court of international opinion will be ignorant of anything recorded in that language. In other words, evidence must be in English when presented to the court of international opinion, as if it were a rule of civil procedure. And in general, English speakers are not well-equipped to check the accuracy of the translation.

As it happens, there is an official-language requirement in one place in Korea: The courtroom. Evidence submitted to the court must be in the Korean language. Anything that originally comes from a foreign language must be translated by a party into the Korean language. And here’s where we often see misconduct—parties to litigation often deliver to the court Korean-language translations of foreign-language evidentiary materials which are deliberately (I guess if you want to give the benefit of the doubt you could say with gross negligence) inaccurate and misleading to the judge. That puts the party responding to the evidence at a profound disadvantage, because once translated evidence is offered by one party, it’s natural to suspect the other party’s response is self-servingly fake.

Far better, I say, to have agreed Korean-language translations prepared and existing, as an insurance policy (as well as a simple aid to understanding), at the start of your commercial relationship than to leave the job of rendering a Korean-language version to a party seeking to gain advantage in the court. Contract in English, yes, but spend a little extra money on good translations while the sun is shining.

As a practice point, I note that if you’re going to have two versions of a contract extant, the one which is simply a translation prepared for reference should be clearly marked as such, and both versions should contain a clause indicating which version shall control in the event of conflict or error in terms. And for God’s sake, don’t sign both versions! This has caused too many problems to count.

(Tip o’ the hat to the Marmot’s Hole for linking the original story.)

Over the weekend a story appeared on the Korea Times website about the risks associated with Korea’s housing prices and home loans, a topic near and dear to my heart. It seems Korea’s housing finance system puts borrowers at risk in a manner similar to the sub-prime meltdown and coming adjustable-rate mortgage tsunami in the States.

You see, virtually all (90%, according to the Korea Times story) of Korea’s home loans are adjustable-rate mortgages, the kind which are now roiling the US housing market as they reset. Foreign bankers at HSBC, KEB, and Citibank have tried to interest Korean borrowers in fixed-rate loan products, but the market has heretofore been wholly uninterested in such loans. Korean borrowers prefer, and therefore the banks provide, adjustable-rate mortgages. When we bought our apartment, although I specifically instructed my wife (since Korean banks refuse to lend to foreigners, even those with a good job and 12 years’ continuous residency) to get a long-term, fixed rate product, she brought back an adjustable-rate loan—and then argued with me about how stupid the long-term, fixed rate product was. (Why my wife refuses all finance advice from me may be another story.)

But Koreans do Southern California one better. Korean housing loans, in general, are also not “fully-amortizing” loans—instead, borrowers take out an interest-only loan with a term of one to three years, during which time they pay only the interest and none of the principal (although, like my family, they might save separately and pay down the principal that way). At the expiration of the term they roll the note over. Why don’t they pay any of the principal during the term of the loan? Well, for starters, just like the fools in the US housing bubble, nearly all Koreans are convinced that “Real estate only goes up. They’re not making any more land, you know.” But also, the principal balances—even on 50% LTV loans—usually exceed six or seven times the borrowers’ annual income. As a result, the interest expense is too great to add principal repayment to the burden.

Besides, because property always goes up, and lately has gone up like wildfire, only a sucker would pay principal now. You can take care of that when you sell the property, from all the capital appreciation that’s guaranteed to occur! After all, real estate only goes up. They’re not making anymore land, you know.

Now we add the risk factor of the variable-rate loans. Because of the wild property bubble inflation of the last few years, a lot of Koreans have stretched themselves by buying into properties on which they can barely afford the interest-only payments. Interest rates have been quite low of late, with housing loans in the high 5% range available (again, not to you, Mr. Good-Job Foreigner, but any Korean on the street could get one).

But what happens when the interest rate increases, say, to the high 7% range? That interest-only payment, which the homeowner could barely afford in the first place, is now almost 40% greater than it was before. A W1,000,000 payment (which would comprise half the after-tax monthly income of the average Korean wage earner) is now almost W1,400,000. It becomes that much harder to pay the interest. (Remember, most borrowers don’t touch the principal.) Also, since local banks are now required to examine the borrower’s ability to continue to service the loan, by comparing the payment burden to the disposable income of the borrower, many Korean homeowners may find it hard to roll those notes over.

And that means lots of foreclosure sales, or short sales, coming soon. But those tend to depress prices. So mark my words, Korea’s property is entering a deflationary phase. In Japan, Hong Kong, and Singapore, at least, past experience with property bubbles has shown us losses of up to 70% are possible.

Here’s where the 50% loan-to-value ratio hurts the Korean homeowner more heinously than the Americans who’ve lost their homes in the sub-prime crisis: The price decline eats up equity first—the bank’s loan gets paid off in the repossession sale, with the homeowner getting what’s left. This means in the coming bubble deflation, years and years of hard-earned cash savings are about to be lost. In the States, people get dinged on their credit scores and lose a few thousand dollars on the down payment (and no-money-down buyers just lose the imaginary bubble gains)—in Korea, people are going to lose real, hard-to-replace cash.

We’ve been through this kind of thing before—in 1998, interest rates spiked and asset values dropped slightly, putting a lot of apartments into foreclosures and auction sales. What’s different about now and 1998 is that the world economic conditions are different, as well as local ones. In 2009 there will be no American foreign investors galloping to the rescue, that’s for sure. This is going to be ugly.

The Maeil Kyungjae reports that while I’ve been bleating about Korean apartment prices being too high, they’ve started falling. At least, in neighborhoods better than mine.

Here’s some select bits I’ve translated from Korean to English for the benefit of Korea Law Blog readers:

Where is the “Floor” for Expensive Apartment Prices in the “Bubble Seven”?
Medium- to Large-Size Kangnam Apartments Projected to Drop Another 10-20%

Chart:

[Prices compared Nov. 2006 to June 2008]

Daechi-dong Mido 2-cha Apts (181.8 sq. m.): W3.05 billion -> W2.45 billion (-W600 million)

Daechi-dong Gaepo Woosung 1-cha Apts (214.8 sq. m.): W3.7 billion -> W3.15 billion (-W550 million)

Bundang Geumgok-dong Athena Rex (218 sq. m.): W1.55 billion -> W1.29 billion (-W260 million)

Mok-dong Shinshi Gaji #4 Complex (181.8 sq. m.): W2.05 billion -> W1.625 billion (-W420 million)

“It is difficult to foresee price increases unless there is some striking news like a change to the debt-to-income ratio regulations,” said UNR Consulting Representative Director Sang-Eon Park. “Shrinking demand means an additional 10-20% price decline seems possible for medium- to large-sized apartments.”

I have to believe that eight-buck-a-gallon gas (W2000 per liter)—and Koreans’ inexplicable preference for bloated black sedans that get 15 mpg—has something to do with these falling housing prices. The “Bubble Seven” story reports that satellite-city apartments in Bundang and Yongin are off 15-20% in June. My law partner Doil and I have had a project that has required us to drive out to the Kyeonggi Province city of Kwangju, and the roads have been oddly clear—Doil says it’s like being Will Smith in “I Am Legend” (except that we’re in an Equus—blech).

The Doctor Housing Bubble blog has already examined how gas prices and the stark increase of commuting cost has ravaged California’s exurbs. And that’s at just four bucks a gallon. It’s my belief that the Korean housing bust will be felt most acutely in Bundang, Yongin, Ilsan, Pangyo, and the other satellite cities of Kyeonggi Province, whose residents must commute to Seoul.

Anyway, back to Seoul… Strangely, though, while the prices of these “large” (which is, of course, a relative term—181.8 sq. m. probably yields only 1500 sq. ft. of usable living space, assuming a 75% ratio) apartments apparently drop by such large amounts, the cost of renting in Kangnam—and other areas perceived to have good “neighborhood facilities” (i.e., cram schools)—is going up:

In particular, in the Kangnam’s Daechi-dong and Dogok-dong, which are swimming in hagwon, there has been a rush of inquiries from apartment hunters in advance of the summer school holidays.

Chonsei lease price for a 112 sq. m. apartment in the Daechi-dong Mido 1-cha apartments has gone up by W10 million to the W305-375 million range, while an 85 sq. m. “A"-type apartment at Dogok-dong’s Dogok Rexle has gone up by W5 million to between W325 million and W340 million.

It’s much the same in Nowon-gu’s Chunggye-dong, which is said to be the “Daechi-dong” of the Kangbuk area.

The Konyeong 2-cha apartments, where the neighborhood is chockablock with hagwon, the popular 92 sq. m. apartment lease price has advanced by W22 million to reach the W155 million level.

Furthermore, the 105 sq. m. apartments, which share popularity with the 92 sq. m. size, are also transacting W15 million higher, at W170 million.

Summer “vacation”, what a cruel, cruel lie that is! In Korea, it’s just eight extra hours of cram school education.

I don’t send my children to hagwons (other than a taekwondo class, which is mainly just for health) because I think Korea’s cram school environment is cruel to children. Also, since I spend so much on tuition at the Yongsan International School of Seoul, I don’t actually have any money left over to send them to hagwon even if I wanted to do so.

Still, based on this weekend’s reports, I know what to do to help maintain or increase the price of my own (thankfully close-in) apartment: Open a hagwon—or, better yet, open two of them right next door to each other.

U.S. Secretary of State Condoleezza Rice calls South Korea a “global partner” but Japan and Australia “allies” in an article in the July-August issue of bimonthly journal Foreign Affairs, in what appears the latest manifestation of a subtle shift in America’s regional focus.

In a cover story entitled, “Rethinking the National Interest, American Realism for a New World,” Rice writes, “Democratization is also deepening across the Asia-Pacific region… This is expanding our circle of allies and advancing the goals we share.”

“We enjoy a strong, democratic alliance with Australia, with key states in Southeast Asia… and with Japan—an economic giant that is emerging as a ‘normal’ state, capable of working to secure and spread our values both in Asia and beyond.”

As for South Korea, it “too, has become a global partner whose history can boast an inspiring journey from poverty and dictatorship to democracy and prosperity,” she adds.

America’s great friends Russia and China are usually described as US “partners” in this kind of diplospeak, so Rice’s description ought to send a chill down the spine of everyone in Korea who cherishes the “alliance forged in blood” and the special treatment—in military affairs and in trade affairs too—that Korea has received for 50 years as a result.

I wonder how the latest beef protests may figure into US policymakers’ evaluation of the relationship. I don’t think Rice would have been writing for Foreign Affairs with knowledge of the late May events in Seoul. Yes, the Korea-US Free Trade Agreement is dead, dead, dead (good job, guys!), but is the dysfunctional ROK-US “alliance” also dead? Korea is in a bad neighborhood with China, Russia, and North Korea. If the US is ready to wash its hands of the Republic of Korea as an ally, the tax burden for Korean taxpayers is about to spike higher—because the free US defense umbrella is worth a hell of a lot to this country.

A factor leading up to the Korean War was Secretary of State Dean Acheson’s January 1950 speech where he left Korea out of the description of the American defense perimeter in Asia—his list of Asia-Pacific allies, if you will. These are interesting times indeed.