Won-yuan market opens in Seoul, moving toward global yuan

A market to directly trade currencies of South Korea and China, rather than brokering the two currencies with the U.S. dollar, was opened here in Seoul Monday, taking its first step toward Chinese yuan's internationalization efforts in Northeast Asia.

To exchange the won and the yuan, one currency should have been swapped into the U.S. dollar first to gain the other currency that is changed with the dollar later. Such brokering doubled currency transaction costs between the two countries, whose annual trade has grown about 50 times since they set up diplomatic ties in 1992.

During the July summit meeting in Seoul between Chinese President Xi Jinping and his South Korean counterpart Park Geun- hye, the two leaders agreed to launch the won-yuan direct trading market by the end of December to resolve inconveniences and deepen economic ties between the two neighbors.

"The won-yuan market is a venture growth company having a great potential. The company will be fostered here into a world- class business with competitiveness," Finance Minister Choi Kyung- hwan said in an opening ceremony.

"If the won-yuan market matures, transaction costs for the two currencies will fall and the bilateral trade will rise, contributing to economic growth for both countries," Bank of Korea Governor Lee Ju-yeol said at the launching event. Lee noted that the matured won-yuan market would offer South Korea an opportunity to develop into an offshore yuan hub.

PREPARATIONS FOR YUAN HUB

Since the summit meeting, South Korea has prepared to launch the direct trading market as part of efforts to take the yuan-hub position in Northeast Asia. The Chinese currency is increasingly used in global trade and investment, with yuan settlement in trade surging from 2.06 trillion yuan in 2012 to 3.01 trillion yuan in 2013 worldwide.

In late October, the South Korean government announced a comprehensive plan to spur yuan transactions in the local market, targeting an increase in yuan holdings first. If South Korean companies settle trade in the yuan, they will receive benefits from the government, including export insurance.

"Enhancing recognition of banks and companies and expanding financial products to invest in with yuan holdings will matter," Tark Yunsung, a director of Financial Services Commission (FSC)'s international finance division, told Xinhua by phone.

He said employees in many banks and trade firms had little knowledge on how to manage yuan holdings and what benefits they would gain, stressing the need for enhancing recognition among local players.

Tark said the financial regulator has been in talks with its Chinese counterpart to increase financial products that South Korea's financial companies can buy to prevent lack of management tools from stemming the growth of the won-yuan trading market.

The FSC planned to increase the portion of yuan settlement in trade with China to 20 percent in the long term. In 2013, South Korea and China traded 228.8 billion dollars of goods and services, among which 1.2 percent was settled with the Chinese currency.

South Korea's central bank picked 12 domestic and foreign banks as market makers for the direct trading market earlier this month. They will present bid and offer prices and provide liquidity at the won-yuan market to prop up inter-Korean transactions between the two currencies.

GLOBAL YUAN EFFORTS

China lent support to South Korea in its effort to become one of offshore yuan hubs. South Korea was granted 80 billion yuan (13 billion U.S. dollars) of quota under China's renminbi qualified foreign institutional investors (RQFII) program, equaling the amount awarded to France and Britain and higher than 50 billion yuan given to Singapore.

It enabled South Korean financial companies to directly invest in China's financial markets with yuan funds earned from the won- yuan trading market.

To help provide sufficient yuan liquidity in Seoul, the two countries extended their bilateral currency swap line for three more years. People's Bank of China designated Bank of Communications, the fifth-largest Chinese lender, as a clearing bank for RMB business in Seoul. The bank launched its clearing service last month.

The leaders of China and South Korea concluded substantive negotiations for the bilateral free trade pact earlier this month on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Summit meeting held in Beijing. It is expected to help boost yuan settlement in trade between Seoul and Beijing.

The Chinese currency-linked financial products have grown in South Korea, reflecting expectations for the growth in the won- yuan direct trading. Banks rolled out yuan-deposit products recently, and the first won-yuan currency option contract was inked by Korea Exchange Bank, South Korea's fifth-largest bank, in early November to help a local manufacturer hedge against volatility in the won/yuan exchange rate.