[Viewpoint] Wondering about the won

A debt security denominated in U.S. dollars issued by a non-American entity in the U.S. market is called a Yankee bond. If foreign institutions or governments issue a pound sterling-denominated bond in London, it is called a Bulldog bond. The term is Samurai bond if a foreign entity issues a yen-denominated debt in Japan.

The Asian Development Bank in 1995 floated a bond denominated in the Korean won. It was the first time a foreign entity raised debt in Korea’s currency. We christened it the “Arirrang bond.” But the ADB sold the debt back to the state-run Korea Development Bank and was paid in U.S. dollars in a currency swap arrangement.

Therefore, the won failed to go beyond its motherland. Few desire debt denominated in the Korean currency because it is not one of the reserve foreign exchanges. If a foreign entity issues a bond in the Chinese renminbi, it is called a Panda bond. The first of its kind was issued in 2005. We were a decade faster.

The Eurodollar, or a deposit denominated in U.S. dollars in banks outside the U.S., was a fallout of the Cold War. In the Cold War era following World War II, when the U.S. and Soviet Union were fighting for influence around the globe, the Soviets and their communist allies were worried about their U.S. dollar assets. They worried the deposits might be frozen if they ever went into a “hot” war.

So they started to transfer money to European banks. For instance, the Soviet Union would deposit its U.S. dollars in a British bank and the bank would lend the capital to another country, in effect freeing the U.S. dollar from the sole jurisdiction of the Federal Reserve. Such a platform was called the external market. The Eurodollar helped to give birth to the offshore market.

Awhile ago, American fast food franchise McDonald’s issued renminbi bonds worth 200 million yuan ($29.4 million). But the bond cannot be dubbed a Panda because it was issued in Hong Kong, outside the Chinese mainland jurisdiction. The bond was the first to be issued in the Chinese currency outside the mainland.

One of the world’s largest private equity firms, Texas Pacific Group, also plans to create a 5 billion yuan RMB-denominated fund in Hong Kong. China was long expected to use Hong Kong as its offshore market. Thanks to the unique arrangement called “one-country-two-systems,” the Hong Kong market has the best of offshore and onshore worlds.

Separately, China, with $2.5 trillion dollars in state coffers, has begun gobbling up Korean sovereign bonds. Foreign exchange reserves are usually easily available in hard cash and exchangeable on the international stage. But China purchased as much as $3.7 billion in Korean sovereign debt denominated in won that is hardly considered a global currency.

We cannot but suspect Beijing has motives for stockpiling Korean money. Because of China’s large purchase, the won’s value shot up. China also bought a staggering $20.3 billion in Japanese sovereign debt recently even through it offers poor returns because of ultralow interest rates. The yen’s value shot up because of the Chinese purchase, and Japanese exporters started crying out for help. The Japanese authorities tried to take action, but they were too late. China has started to make trouble for Korea and Japan.

China has begun a campaign to make the renminbi a global reserve currency. In March, its central bank governor publicly proposed to end the greenback’s primacy by replacing its super-sovereign reserve role with special drawing right issued by the International Monetary Fund. It raised the curtain on a stage in which the yuan is supposed to play a star role.

The campaign to globalize the Chinese currency will likely gain speed once Beijing fully utilizes Hong Kong as the yuan’s offshore market. China already began settling its external trade in yuan at foreign banks, making its currency more accessible. Rich in foreign currency reserves and backed by an advanced financial market like Hong Kong’s, China is now capable of stretching beyond Asia to exert clout in world financial markets.

As we look inward, the scene is depressing. Our won-denominated Arirang bond is ten years older than the Chinese Panda. But can we confidently say we are that much more advanced than China in finance? Does a grand plan to advance the local financial market exist anywhere? Can we ever dream of one day seeing the won treated as a reserve currency?

*Translation by the JoongAng Daily staff.
The writer is a professor of business administration at the University of Seoul.

By Yun Chang-hyun