[Redirecting the Flow of Money]③ Korea Trails China in Advanced Technology While Capital Remains in Real Estate... Financial Structure Must Be Reformed to Fix 'Distorted Resource Allocation'

Korea Lags Behind China in All 12 Strategic Technologies... Urgent Need to Redefine the Role of Finance
US, China, and Europe Mobilize Subsidies and Funds—Technology Competition Expands Into a Capital Race
Korea's Financial Sector Still Focused

Editor's NoteThe Lee Jaemyung administration has declared a sweeping shift toward 'productive finance.' The core strategy is to redirect capital flows from the real estate sector to advanced and strategic industries. As the global competition for technological supremacy intensifies into a 'capital war', the United States, China, Japan, and Europe are combining state capital with private finance to pour astronomical sums into their strategic industries. By contrast, South Korea's financial system is still heavily focused on real estate-secured lending, drawing sharp criticism for its conservative structure. There are growing concerns that continued distortion in resource allocation could result in Korea falling behind in the technology race. In response, the government has launched the 150 trillion won 'National Growth Fund', combining policy and private finance, to initiate structural transformation. This article examines the necessity of productive finance, the limitations of private finance, and the key policy tasks ahead.

As the global race for advanced technology supremacy escalates, competition among nations is expanding beyond a 'technology war' to a 'capital war.' Yet, Korea's financial structure remains stuck in a capital allocation heavily skewed toward real estate, making it difficult for funds to flow smoothly into innovative industries. Calls are growing to rectify the distorted allocation of scarce resources and to redirect capital into more productive sectors.

All 12 Strategic Technologies Lag Behind China… The Gap Is 'Capital', Not 'Technology'

According to the National Science and Technology Advisory Council on April 26, the '2024 Technology Level Assessment' reported by the Ministry of Science and ICT at the end of last year found that South Korea did not surpass China in any of the 12 major national strategic technologies. When the United States, the leading technology holder, is set at 100%, only hydrogen technology matched China's at 80.0%, while Korea lagged behind China in the remaining 11 sectors, including semiconductors, displays, secondary batteries, and artificial intelligence (AI).

In detail, Korea, which ranked first globally in secondary batteries in 2022, was overtaken by China within just two years, resulting in a gap of 0.2 years. In the fields of aerospace and marine, the gap with China has widened to 5.1 years; in quantum technology, 3.3 years; in advanced biotechnology, 1.3 years; and in AI, 1.2 years. Semiconductors and displays also trail China by 0.1 years.

Experts analyze that the fundamental reason South Korea is lagging behind China in most strategic technologies is not merely a matter of technological capability, but rather a gap in national capital mobilization. Under its 'Made in China 2025' strategy, China has concentrated state capital into core industries such as semiconductors and batteries. More recently, following the announcement of the '15th Five-Year Plan' at the National People's Congress, China has accelerated the design of an economic structure centered on advanced industries such as AI.

The United States and major European nations are also combining government subsidies with private finance to secure technological competitiveness. The United States, under the CHIPS Act of 2022, provided a total of $52.7 billion in government subsidies to the semiconductor sector. Recently, not only big tech companies but also private equity funds, banks, and other financial institutions have joined large-scale investments in AI data centers through project financing (PF). Germany, meanwhile, has established a 30 billion euro German Fund as a catalyst to expand private investment to 130 billion euros.

Likewise, at the end of last year, Korea launched the National Growth Fund, combining government, policy finance, and private funds to support industries with a total of 150 trillion won. The plan is to supply long-term capital through ultra-low interest loans and equity investments across strategic industries such as AI, semiconductors, biotechnology, defense, and energy. This move reflects the government's strong determination to enhance industrial policy through finance and to secure future growth engines amid the global technology hegemony race.

Household Debt-to-GDP Ratio at 90%... "Redirect Capital Flows Through Productive Finance"

However, the prevailing assessment is that the role of private finance in innovative industry investment remains limited. While risk-sharing financial instruments such as unsecured loans and venture debt are thriving abroad, Korea's financial sector remains entrenched in collateral-based household lending and risk-averse structures. The concentration of finance in real estate is particularly pronounced. According to the Institute of International Finance (IIF), as of the third quarter of 2025, Korea's household debt-to-GDP ratio stands at 90.2%, the highest among major economies except for Canada (100.0%). This figure is far above the global average of 57.3%. The proportion of real estate in household assets also reached 64% in 2023, significantly exceeding the OECD average of 52.9%.

In this structure, financial institutions have secured stable profits through collateralized loans, but this has resulted in adverse effects, namely the inability of capital to flow into corporate investment or innovative industries. Conservative lending practices and prudential regulations, strengthened after the 1997 foreign exchange crisis, have further exacerbated this trend.

Experts point out that unless the current capital allocation structure is changed, it will be difficult to secure competitiveness in future industries. Since massive long-term capital is needed from technology development to mass production, expanding the role of private finance, in addition to policy finance, is essential. Lee Junghwan, Professor of Economics and Finance at Hanyang University, noted, "China is redesigning its policy direction with a focus on AI, suppressing real estate finance, and accelerating the promotion of manufacturing. While capital concentrated in real estate becomes riskier if prices fall, channeling it to companies can generate a sustainable cash flow, making productive finance the desirable direction."

However, he argued that continued regulatory easing by the government is necessary, such as relaxing risk-weighted asset (RWA) regulations for loans to small and venture businesses and allowing banks to expand equity investments in non-financial firms. Professor Lee emphasized, "It is a conflicting goal to maintain prudential regulations while asking banks to expand risk-sharing investment. Despite various incentives the government has introduced, including recent measures to ease RWA burdens in light of major financial accidents, bolder regulatory relaxation and institutional support are needed for productive finance to take root."

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