Yuan’s status upgrade welcomed

The Korean government and businesses have welcomed the status upgrade of the Chinese yuan as one of the central currencies equivalent to the U.S. dollar, euro and Japanese yen.

As trade between Korea and China continues to expand and will likely increase further once the bilateral trade agreement starts next year, the use of Chinese currency in cross-border trade will likely lessen the risk of fluctuations in U.S. dollar exchange.

The Korean Ministry of Strategy and Finance on Tuesday welcomed the International Monetary Fund’s overnight decision to include the Chinese renminbi in its elite reserve currency basket, the special drawing rights (SDR), which is an international reserve asset.

The Finance Ministry said the inclusion of the Chinese yuan in the SDR basket shows the international recognition of the Chinese currency and expects use of the renminbi in the global market to expand.

“It signifies the renminbi’s global importance, stability and liquidity,” HSBC Korea CEO Martin Tricaud said. “It can encourage Korean investors to hold the renminbi as a store of value as opposed to converting all foreign currency into either Korean won or U.S. dollars as they do today. Over the longer term, the demand for renminbi products and renminbi and Korean won across businesses will likely increase.

“With a large trade volume with China and the strong government support for RMB internationalization in Korea, Korea is ideally placed to support China’s integration into the global financial system, which will be reinforced by the renminbi’s inclusion in the SDR basket.”

According to the Society for Worldwide Interbank Financial Telecommunication, the Chinese yuan as of September ranks fifth after Japan when it comes to international trade settlements, as it accounts for 2.5 percent. The U.S. dollar holds the dominant position with 43.3 percent, followed by the euro with 28.6 percent.

In Korea alone, the use of Chinese currency as a trade settlement has been increasing largely on the back of growing trade with China.

China is currently the country’s biggest trading partner. As of 2014, exports to China from Korea accounted for 25.4 percent of all exports. This is twice the size of trade with the second-biggest export market, the United States, with 12.3 percent. Even in imports, China is the biggest partner, accounting for 17.1 percent, while the second-largest trading partner is Europe, which accounts for 11.9 percent.

According to the Bank of Korea, yuan trade settlement has quadrupled from $240 million in September 2014 to $930 billion in September 2015. In trade with China, the yuan accounts for 3.4 percent of trade settlement as of the third quarter. In the fourth quarter of 2014, it only accounted for 1.7 percent.

The use of the Chinese yuan is expected to further increase largely due to the Chinese government’s Shanghai-Hong Kong Stock Connect program that lowered the bar for investing in Chinese companies last year.

However, some market experts caution that increased use of the Chinese yuan in the long run could make Korea too vulnerable to the economic situation in China.

“When the Chinese financial market becomes unstable with the yuan fluctuation, the Korean economy may be easily affected,” Yoon Chang-yon, analyst at Shinhan Investment, said. “Additionally, it could also worsen the price competitiveness of exported Korean products.”

There were also concerns that foreign investors could exit the Korean financial market in favor of the Chinese market.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]