By Nam Hyun-woo
KEB Hana, Woori and several other Korean banks will likely be invited to join the direct won-yuan trading market which will open in Shanghai next month, according to government officials, Tuesday.
The won-yuan direct market in Shanghai would be the first time for the Korean currency to be traded outside the country on a spot exchange. Up to four Korean banks are expected to have the status of market makers.
In foreign exchange, a market maker is a bank selling and buying currencies to facilitate trade in the currency pair and provide liquidity to the market. They generate gains through price differentials, and this will allow domestic banks to gain a new revenue source.
“For the won-yuan exchange market, participation of Korean banks as market makers is essential” said a Ministry of Strategy and Finance official. “Therefore, it is highly possible that some Korean banks will be selected by the Chinese financial authorities.”
Without the direct exchange market, payments in won have to be exchanged into dollars which are then exchanged into yuan, raising transaction costs.
The People’s Bank of China will announce which banks will be asked to join as early as next month.
Korean banks’ Chinese subsidiaries are expected to apply for the status and a number have already shown interest.
Last month, the Bank of Korea (BOK) announced KEB Hana and Woori Bank as settlement banks for the Shanghai direct market. Settlement banks are customarily automatically designated market makers.
“We see a high possibility of becoming a market making bank,” said a KEB Hana Bank official. “This will create a huge opportunity for KEB Hana, given some 500 Chinese banks will participate in the market and we can showcase our presence to them, which will further boost our businesses.”
The market will follow the Seoul-based won-yuan direct trade market. Since its opening in December 2014, some $2.26 billion was traded in the past year, 26.4 percent of the amount of won-dollar trade over the same period.
According to the BOK, Korea’s China-bound trade paid through the won and the yuan reached $4.2 billion and $6.7 billion, respectively, last year.
The share of the yuan and won in settlements of Korea-China trade is around 3 percent and 2 percent, respectively, but this will likely increase sharply after the opening of the direct market in Shanghai, according to market watchers.
A government official, who refused to be identified, said: “Creating the Shanghai market is to allow the won to be more popularly used in global trading, thus, the market will serve as a test bed that can gauge whether further efforts to enhance the won’s influence will be successful or not.”