'Policy-Type Korean New Deal Fund' Established with 20 Trillion KRW Scale... Government Takes Priority on Investment Risk

Public Participation New Deal Fund Formation and New Deal Financial Support Measures

Establishment of Policy-type New Deal Fund…Government Creates Mother Fund to Invest in Child Funds Centered on Private Capital
New Deal Infrastructure Fund, 9% Separate Taxation on Dividend Income within 200 Million KRW

[Asia Economy Reporters Ju Sang-don, Moon Chae-seok (Sejong), Koo Eun-mo] The core of the Korean New Deal Fund creation plan announced by the government on the 3rd is the 'establishment of a policy-type New Deal fund.' The government will create a mother (mo) fund through government investment and child (ja) funds with private capital, with the mother fund bearing the initial investment risk to maximize the returns for private participants. The government aims to induce New Deal investments by bearing the investment risk, but controversy is expected as losses in the future would have to be compensated with taxpayers' money. There are also criticisms that the government is infringing on the market's autonomous adjustment function.

On this day, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, announced the 'National Participation-type New Deal Fund Creation Plan' containing these details at the first 'Korean New Deal Strategy Meeting' chaired by President Moon Jae-in.

Deputy Prime Minister Hong presented three pillars of the Korean New Deal Fund: ▲ establishment of a policy-type New Deal fund ▲ fostering of New Deal infrastructure funds ▲ activation of private New Deal funds.

◆ Government Bears Investment Risk First = Through fiscal investment in the newly established policy-type New Deal fund, the government will bear investment risks first, provide incentives such as unprecedented tax benefits to New Deal infrastructure funds, and seek to discover and present profitable, high-quality New Deal projects through private New Deal funds.

The policy-type New Deal fund consists of a mother fund created with a total of 7 trillion KRW contributed by the government and policy financial institutions (3 trillion KRW and 4 trillion KRW respectively) and child funds raised with 13 trillion KRW of private capital. The total amount raised is 10 trillion KRW. The government plans to include 600 billion KRW of government investment in next year's budget. When child funds are created, mother fund capital will be matched.

To induce private investment, the mother fund created by the government and policy financial institutions will take on subordinated investment to bear the investment risk first. Since returns are distributed starting from the senior tranche, private investors participating in the senior tranche can earn higher returns.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, explained, "The government takes primary responsibility when returns are poor," adding, "Funds coming from the private sector will be free from such criticism (regarding low returns)."

The investment targets of the policy-type New Deal fund include New Deal-related private projects such as Green Smart Schools and hydrogen charging stations, New Deal-related projects like hydrogen and electric vehicle development, and New Deal infrastructure such as data centers and eco-friendly and renewable energy facilities.

The government also aims to foster New Deal infrastructure funds through tax benefits. For dividend income on investments within 200 million KRW, the current separate taxation rate of 14% will be reduced to 9%. Additionally, tax support will be limited to public offering funds, and the development of short-term public infrastructure funds with a lifespan of 5 to 7 years will be considered. The government also plans to improve the system to include bonds related to private projects (senior tranche) as eligible for retirement pension investments. There are criticisms that this might mean the government is mobilizing citizens' retirement funds as policy capital.

Activation of private New Deal funds will also be promoted. Unlike New Deal infrastructure funds that must invest a certain ratio (e.g., over 50%) in New Deal infrastructure, private entities will be encouraged to freely discover New Deal investment destinations and form funds. To this end, the government will support field complaints and regulatory improvements.

◆ Market is Skeptical = Industry reactions are mixed. First, there is a positive response to the government's active intention to stimulate the market. An industry official said, "It appears that the government is actively preparing measures to provide investors with various opportunities for profit through finance, and we expect this to have a positive impact on the financial market in the future."

On the other hand, there are opinions that the so-called government-controlled Korean New Deal Fund infringes on the market's autonomous formation function. Another industry official said that the market is originally where prices and interest rates are determined by supply and demand, and policies that effectively guarantee principal and fix returns infringe on the market's autonomous formation function. This is criticized as "deep government involvement that contradicts market logic." An asset management industry official expressed concern, saying, "It should be left to market principles, but the idea of attracting private capital with incentives and trying to create funds is a reckless move," adding, "In the case of the previous KOSDAQ Venture Fund, the government distributed money to support venture startups, but actual nurturing did not happen, and there were more cases of 'eat and run'."

This content was produced with the assistance of AI translation services.