[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 Note
The Lee Jaemyung administration has declared a major shift toward "productive finance." The key policy is to redirect capital concentrated in real estate toward advanced and strategic industries. As the global competition for technological supremacy evolves into a "capital war," the United States, China, Japan, and Europe are combining state capital with private finance to pour astronomical amounts into strategic sectors. In contrast, Korea's financial sector is criticized for remaining stuck in a conservative, real estate-collateralized lending structure. There are growing concerns that continued distortions in resource allocation could cause Korea to fall behind in the technology race. In response, the government has launched the 150 trillion won "National Growth Fund," which merges policy finance with private capital as a first step toward structural transformation. This article examines the necessity of productive finance, the limitations of private sector finance, and the policy challenges that lie ahead.

As global competition for advanced technology supremacy intensifies, competition between nations is expanding beyond a "technology war" into a "capital war." However, there are growing concerns that Korea's financial sector remains unable to move capital away from real estate and supply sufficient funding to innovative industries. Voices are growing louder that the distorted allocation of limited resources must be corrected, and that capital flows must be redirected toward productive sectors.

All 12 Strategic Technologies Lag Behind China... Not a 'Technology Gap,' but a 'Capital Gap'

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 among the 12 national strategic technologies, Korea was not ahead of China in any single area. Using the United States—the global technology leader—as the 100% benchmark, Korea's hydrogen sector scored 80.0%, matching China, but in all 11 other sectors, including semiconductors, displays, secondary batteries, and artificial intelligence (AI), Korea lagged behind China.

More specifically, in the secondary battery sector, Korea, which was ranked number one globally in 2022, was overtaken by China in just two years, creating a 0.2-year gap. In the aerospace and marine sectors, Korea is 5.1 years behind China; in quantum technology, 3.3 years; in advanced biotechnology, 1.3 years; and in AI, 1.2 years. In semiconductors and displays, Korea trails China by 0.1 years.

Analysts say that Korea's lag behind China in most strategic technologies is not simply due to differences in technological capability, but also to a gap in the ability to mobilize capital at the national level. China has concentrated state capital into key industries such as semiconductors and batteries under its "Made in China 2025" strategy, and more recently, following the announcement of its "15th Five-Year Plan" at the National People's Congress, it has been accelerating the restructuring of its economy around advanced industries like AI.

The United States and major European countries are also combining government subsidies with private finance to secure technological competitiveness. In 2022, the United States provided a total of 52.7 billion dollars in government subsidies to the semiconductor industry through the CHIPS Act, and recently, not only big tech companies but also private equity funds and banks have been participating in large-scale investments in AI data centers via project financing. Germany has created a 30-billion-euro national fund as a catalyst to expand private investment to as much as 130 billion euros.

Korea has also launched the National Growth Fund at the end of last year, combining government, policy finance, and private funds to provide a total of 150 trillion won in industrial support. The plan aims to supply long-term capital to strategic industries—such as AI, semiconductors, bio, defense, and energy—through ultra-low interest loans and equity investments. This reflects the government's strong determination to strengthen industrial policy through finance and secure future growth engines amid global competition for technological supremacy.

Household Debt-to-GDP Ratio at 90%... "Capital Flows Must Shift to Productive Finance"

Despite these efforts, the consensus is that the role of private finance in investing in innovative industries remains limited. Overseas, risk-sharing finance such as unsecured loans and venture debt is active, whereas in Korea, the practice of collateral-based household lending and risk-averse financial structures has become entrenched. In particular, the concentration of finance in real estate is at a serious level. According to the Institute of International Finance (IIF), as of the third quarter of 2025, Korea's household debt-to-GDP ratio is 90.2%, which is the highest among major countries except for Canada (100.0%). This far exceeds the global average of 57.3%. As of 2023, real estate accounts for 64% of household assets in Korea, far above the OECD average of 52.9%.

Within this structure, financial companies have secured stable profits through collateralized loans, but this has resulted in adverse effects, such as the failure of capital to flow into corporate investment or innovative industries. The conservative lending practices and prudential regulations strengthened after the 1997 foreign exchange crisis have further entrenched these trends.

Experts point out that without changing the current structure of capital allocation, it will be difficult to secure future industrial competitiveness. Since substantial long-term capital is required from technology development to mass production, it is essential to expand the role of private finance in addition to policy finance. Lee Junghwan, professor of economics and finance at Hanyang University, said, "China is redesigning its policy direction around AI by curbing real estate finance and accelerating the development of manufacturing. When capital is concentrated in real estate, price declines increase risks, whereas channeling funds toward companies can generate continuous cash flow, making productive finance the desirable direction."

However, he added that continued government deregulation is needed, such as relaxing risk-weighted asset (RWA) regulations on loans to small and venture businesses and allowing banks to expand their equity investments in non-financial companies. Professor Lee said, "It is a conflicting goal to maintain prudential regulations while asking banks to increase risk-sharing investments. Although the government is coming up with various incentives, such as easing RWA burdens on banks in response to recent major financial incidents, for productive finance to take root, bolder deregulation and institutional support are needed."

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