Won-yuan trading sees supportKorea is moving closer to seeking the first direct trading between the won and the yuan following calls within the ruling Saenuri Party to respond to the growing use of the Chinese currency.
The government will support the implementation of direct trading if needed as demand for the yuan expands in the financial markets and for trade, Vice Finance Minister Choo Kyung-ho said on Tuesday in Seoul.
Saenuri Party leader Hwang Woo-yea requested a proposal for won-yuan trading to be reviewed, according to a Feb. 5 statement on the party’s website.
“Our party is studying if we need to set up an exchange for trading the yuan given China’s increasing weight in terms of trade and transactions,” An Chong-bum, a Saenuri Party lawmaker, said in a Feb. 11 interview at his office. “The idea needs discussion with the government.”
Singapore, the United Kingdom and Australia struck deals with China last year for direct trading links with the yuan, which overtook the euro to become the second-most widely used currency in global trade finance. Korea counts China as its biggest export market and the public’s yuan deposits jumped almost 40-fold in 2013 to the equivalent of $6.67 billion.
A won-yen market that opened in October 1996 proved short-lived as low trading volumes led to its closure in February 1997.
Shipments to China climbed 8.6 percent in 2013, widening Korea’s trade surplus with Asia’s biggest economy by 17 percent to $62.8 billion, according to a Feb. 1 report by the trade ministry. The proportion of overseas sales settled in the Chinese currency was little changed at about 0.4 percent, central bank data show.
The two countries, along with Japan, are in talks to sign a free trade agreement. Increased use of regional currencies in Asian trade will help reduce exchange-rate risks, Deputy Finance Minister Eun Sung-soo said in a conference on Tuesday, adding that Korea, China and Japan need to step up monetary cooperation.
Rising trade between the won and yuan will help Korea prepare for financial shocks as developed nations scale back monetary stimulus that has pumped money into emerging markets, Chung Mong-joon, a Saenuri Party lawmaker, said in a Feb. 14 speech in the Seoul office of the party’s research wing.
“While some cite low yuan transaction volume in Korea as a reason why direct trading is unnecessary, it’s actually the other way around ? volume is low because we don’t have a market,” he said.
The Chinese currency strengthened 1.3 percent against its Korean counterpart this year to 175.6 won, after a 1.5 percent advance in 2013, according to data compiled by Bloomberg.
The yuan was the second-most widely used currency in global trade finance last year, after the dollar, according to the Society for Worldwide Interbank Financial Telecommunication. The Chinese currency ranked eighth in worldwide payments in December with a 1.12 percent market share, climbing from 12th in October, according to Swift.
Establishing a won-yuan market needs a careful approach after the failure Korea experienced with yen trading, Bank of Korea Governor Kim Choong-soo said at a press briefing last week after an interest-rate review.
“Facilitating the use of local currencies for bilateral transactions with China needs some institutional changes in China,” Kim said.
Korean exporters settled 84.6 percent of their payments in dollars in the fourth quarter, a central bank statement showed on Jan. 24. The euro’s share was 6 percent, the yen’s 3.7 percent and the won accounted for 2.3 percent.
Local exporters are not active in settling payments in yuan as there are few ways to hedge the currency, and liquidity is low, making it hard to manage financial risks,” said An Yu-hua, a Seoul-based fellow researcher at Korea Capital Market Institute. “Still, if stabilized, the won-yuan market can benefit companies because it will allow them to cut conversion costs by bypassing the dollar.”