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The Korean won is one of the currencies ― alongside the yen ― that have appreciated the most in Asia this year, but worries about international criticism are preventing the government from implementing capital control rules.
The won’s value has grown by 11 percent against the U.S. dollar over the past four months since mid-June when it reached a year-high mark, data compiled by Yonhap showed Tuesday.
In comparison, the Chinese yuan, which is tightly managed by its government, has only risen by about 2.5 percent. The won and the yen are the only major currencies in Asia that are freely floated on the market. All others use partially or completely managed foreign exchange systems, so their volatility tends to be much lower.
Despite the strengthening currency, Seoul does not plan to implement capital controls at least in the near future, said Yoon Jeung-hyun, minister of strategy and finance.
The minister envied Brazil, which recently raised the tax on financial transactions to 4 percent from 2 percent.
“Brazil does not worry about capital outflow, because investors find the country too attractive to resist regardless of the capital controls. But Korea is not Brazil,” he said during a dinner meeting with reporters in Washington last Saturday. “We don’t have all the resources and the high growth potential Brazil has. Imagine how foreign investors will react if we announce capital controls. They may flee. So having more capital controls is not an option for now.”
Asian countries have been blamed for engaging in a “currency war” by the West, that they are manipulating the value of their currencies to be low in order to benefit their export industries. Korea has intervened in the currency market, but the scope of the intervention was so limited that it could not reverse the trend of sharp appreciation.
For example, the government ordered the Korea National Oil Corporation to buy $750 million on the market in order to curb the appreciation, as The Korea Times reported Tuesday. But such efforts did little to achieve that goal since the amount was small compared to the market volume.
“I don’t think that has a meaningful effect on the market. These days, it’s a $6 billion market every day,” a foreign exchange trader at Hana Bank said on condition of anonymity.
Globally, capital controls have suddenly become a favorite tool in fighting volatility on foreign exchange markets. The Bank of International Settlements estimated that the market has become so big with $4 trillion being traded globally every day. Brazil’s decision to double its already heavy financial transaction tax reflects the trend, minister Yoon said.
“The world has changed,” he said, adding that even the International Monetary Fund, which used to be against any capital controls in favor of free market philosophy, has not raised objections to Brazil. “It seems that they will allow any measure, as long as countries do not meddle with the exchange rate directly.”
Such a mood makes it a good environment for Korea to adopt capital controls if it wants to. But the government is cautious on the negative publicity such plans may bring, so it will not take actions hastily, policymakers say. “We learned that finding the right timing and the right way to implement such measures is very tricky and very important,” Shin Hyun-song, presidential advisor at Cheong Wa Dae, told The Korea Times last week.
With the government reluctant to control the capital inflow, the equity and bond markets are burning hot. On the KOSPI, foreign investors net bought Korean stocks on every trading day between September 10 and October 11 ― a new record ― until finally began selling on Tuesday. The Korean bond market has also enjoyed similar popularity.
Such a bubbly inflow can fast turn into a major disappointment, analysts warn.
“Foreign capital will continue to dominate the KOSPI for the short term. But for the stock market to continue climbing in the long term, it needs to be accompanied by strong fundamentals such as solid corporate earnings," said Kim Soo-young, an analyst at KB Investment & Securities. "Expected operating and net profits of KRX100 firms for 2010 have been on the decline since the end of August. We need to be careful about blindly expecting foreign capital inflows to continue."
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