Won and Yuan aren't so close anymore
The local currency and the Chinese yuan are showing signs of a breakup.
In the past, the won and yuan moved mostly in the same direction — when the yuan went up, so did the won. Recently, however, the link between the two currencies seemed to be losing force, driven by the Ukraine-Russia conflict and dollar outflows from Korea.
The won has been weakening against the dollar due to Russia's invasion of Ukraine, while the yuan is trading stronger than at the start of this year.
The local currency was trading at 1,214.3 won per dollar on Thursday, up 1.7 percent from the previous day.
The won-dollar exchange rate hit 1,242.3 on Monday, crossing the 1,240-won mark for the first time in nearly two years, before bouncing back on Thursday in the wake of the U.S. Federal Reserve’s decision to raise the base interest rate.
Compared to Jan. 3, the won depreciated against the dollar by 1.9 percent.
Meanwhile, the yuan appreciated against the dollar, up 0.4 percent during the same period, trading at 6.349 on Thursday.
Due to the strong yuan and weakening won, the won-yuan exchange rate hovered around the 194 won level since March 7, the lowest in nearly 13 years, but rebounded to 190.84 on Thursday.
The won had been considered almost a proxy for the Chinese currency due to the two countries’ strong economic ties. China is the biggest importer from the export-driven Korean economy, which makes the domestic market highly susceptible to China’s economic situation.
That is why the won had slipped at a sharper pace during the U.S-China trade war back in May 2019.
The won-yuan synchronization is also partly attributed to the fact the won is used to reduce risk in trading yuan assets. Investors often seek won derivatives to curb foreign exchange risk, as yuan transactions are more tightly restricted than those in the Korean currency.
However, the two currencies began to drift apart in late February.
One reason behind the decoupling is a change in dollar supplies.
While foreign capital inflows increased in China for the last five years, foreigners retrieved money from the Korean market during the same period.
As of March 11, Korean shares owned by foreign investors were 31.86 percent of all Kospi shares, the lowest level since 2016. Foreign investors net sold stocks worth 24.7 trillion won in 2020 and 30.7 trillion won in 2021.
“In China, foreigners’ purchase of Chinese assets exceeded the Chinese’ purchase of foreign assets for the 17th consecutive quarter,” said Kim Ho-jeong, Yuanta Securities analyst.
Kim explained that the opposite was true in Korea, as “Koreans’ purchase of foreign assets exceeded foreigners’ of local assets for 19th consecutive quarters.”
The pandemic-driven export boom of China was another reason for a strong yuan.
China reported a record high trade surplus of $676.4 billion last year, with its export volumes increasing 30 percent year on year.
The Ukraine-Russia conflict boosted the yuan as well, as the Chinese currency is expected to gain more users due to economic sanctions on Russia.
“As Russia was removed from the SWIFT system (the global messaging system that enables bank transactions), the country may use the yuan instead, driving up demand for the currency,” said Kiwoom Securities analyst Kim Yoo-mi.
Beijing is also allowing the yuan to strengthen, for now, to rein in soaring inflation caused by the raw material cost hikes.
“The Chinese government is not likely to take any strong measures to cut its currency’s value, as the economic outlook has become uncertain due to the spread of the omicron variant,” said Kim Dae-yong, KB Asset Management analyst.
Kim forecast that “the value of the won and the yuan won’t change drastically” in near future.
BY LEE TAE-YUN [firstname.lastname@example.org]