Govt. considering won-yuan trading market in Shanghai

By Yoon Ja-young

The government is considering opening a won-yuan direct trading market in Shanghai as a means of globalizing the Korean currency.

According to the Ministry of Strategy and Finance, the move follows an agreement reached at the summit between President Park Geun-hye and her Chinese counterpart Xi Jinping in July.

The two leaders agreed to foster a relationship to open a direct market in Shanghai, on top of immediately opening a won-yuan direct trading market in Korea. Following the agreement, the won-yuan market in Seoul opened in December 2014.

“We don’t have a concrete schedule for opening (of the Shanghai direct market) as of yet,” an official at the finance ministry said. However, he said that the ministry ordered research on the improvement of the government system related with foreign currency, including measures to expand the use of the Korean won.

“As you know, we already have a won-yuan direct market in Seoul. If we open such a market in two countries, it will help improve liquidity and increase transactions,” he added.

China has actively opened yuan trading markets with diverse currencies, including the U.S. dollar, Japanese yen, Australian dollar, New Zealand dollar, Russian ruble and Indonesian rupiah.

Previously, Korea was somewhat cautious in opening a won trading market due to concerns over speculators overseas, but it has been seeking measures to speed up globalization of its currency recently. The direct market in Shanghai, which will be the first direct won trading market overseas, will act as a test-bed.

Jee Man-soo, a research fellow at the Korea Institute of Finance, said it will take some time for the won-yuan direct market to prove a success as most of the businesses are still changing yuan to dollar and then the dollar to won instead of using the won-yuan direct market.

“For the market to get on the right track, there should be enough supply and demand of the yuan. It means the exporters should supply the yuan to the market through a trade settlement. They, however, have been using dollars instead for settlement. It will take some time until they switch to yuan, as they will need to have an overhaul of the whole system such as the accounting system, risk management and hedging,” he said.

Some of the large businesses in Seoul started considering switching to the yuan. According to local media, Samsung Electronics also decided to actively use the won-yuan trading market in its transactions with China.

The government expects that exporters can save on foreign currency exchange fees by around 10 percent through the direct market. It hopes to pull up the ratio of the settlement in yuan in total trade with China to 20 percent by boosting the won-yuan trading market.

Jee also said that diverse financial products related with yuan should be launched to increase the demand on the Chinese yuan. He expected to see a noticeable increase in direct trading around the end of this year, at the earliest.

He stressed forming a virtuous circle to boost the direct market. “The transaction cost is determined by the volume of the transaction, while the increase in transaction will also prompt development of related financial products. They will in turn make it more convenient for businesses to make a settlement in yuan,” he added.