South Korea Plans to Buy China Shares to Diversify Reserves

Choo Heung Sik
Choo Heung Sik, director-general for the Reserve Management Group at the Bank of Korea. Source: Bank of Korea via Blooberg

South Korea’s central bank is considering buying several hundred million dollars worth of Chinese equities and a greater amount of the nation’s bonds to diversify its foreign-exchange reserves.

“The Chinese yuan has the potential to become a key reserve currency in the long term and thus we are building a channel to invest there,” Choo Heung Sik, 53, director general at the Bank of Korea’s Reserve Management Group, said in an interview in his office yesterday in Seoul. He said the bank may invest in Chinese shares in the second half of this year, after purchases of debt in the first six months.

The diversification plans for South Korea’s $306 billion of foreign-exchange holdings underscore increasing international interest in yuan assets as China’s global economic stature rises and its government promotes international use of its currency. A slide in yields on U.S. Treasuries has diminished interest income for the world’s largest reserve currency, the dollar.

“Our China investment will be done from a long-term perspective and as part of our asset diversification plan,” Choo said. “Our confidence in the U.S. dollar is still strong. We will move like a snail as for diversification.”

Yield Premium

The BOK said Jan. 18 it received approval from the People’s Bank of China to buy bonds and obtained a license as a Qualified Foreign Institutional Investor, or QFII. Yields on five-year U.S. Treasuries have averaged 1.41 percent in the past year, compared with 3.52 percent for similar-maturity Chinese government debt, according to data compiled by Bloomberg.

Japanese officials said in December their nation will apply to buy Chinese bonds this year. The Bank of Thailand opened an office in Beijing to assess investments in the nation, then-Deputy Governor Atchana Waiquamdee said in September in Bangkok. Nigeria central bank Governor Lamido Sanusi said in a Sept. 7 interview in Hong Kong that his country will shift 10 percent of its reserves into yuan as soon as possible.

The purchases will be the Bank of Korea’s first stand-alone investment in yuan, said Choo, who has been engaged in reserve management for most of his 30-year career. The BOK and 10 other central banks in East Asia and the Pacific are jointly buying local-currency denominated government and government-backed debt in the region through the Asian Bond Fund II set up in 2005, he said.

Yuan Gain

China’s currency strengthened almost 5 percent last year against the dollar, the best performance among emerging-market currencies tracked by Bloomberg.

Officials haven’t decided yet whether to invest in stocks directly or hire asset-management firms, Choo said. “We won’t have an active stock investment strategy -- like keep on selling and buying for extra returns,” he said. “Whether it’s bonds or stocks, we will prioritize stable management.”

The Bank of Korea was the third South Korean investor this year to announce being granted the approval to invest in China. Last month, the National Pension Service, which had 346 trillion won ($307 billion) in assets as of November, said it received a QFII license, as did Korea Investment Corp., the nation’s $43 billion sovereign wealth fund.

Pension Fund

“China’s stock market itself has a big long-term growth potential,” South Korea’s National Pension said in an e-mailed response to questions. “China’s gross domestic product accounts for about a tenth of the global output, while its stock market’s portion in global markets lags behind that level,” the fund said, adding that it also plans to seek “various” investment opportunities within China.

South Korea’s foreign-exchange reserves fell by $2.23 billion to $306.4 billion at the end of December from a month earlier, according to a Bank of Korea report on Jan. 3. The nation’s reserves are the world’s seventh-largest, according to the report.

U.S. dollar-denominated assets account for 63.7 percent of the BOK’s holdings as of the end of 2010, compared with 63.1 percent in 2009, the BOK said in its annual report released in March 2011. The rest comprises investments in euros, yen, pounds and Australian and Canadian dollars, Choo said.

The proportion of stocks in the reserves rose to 3.8 percent in 2010 from 3.1 percent in 2009, last year’s report showed. The BOK also said last year that it bought 40 metric tons of gold in 2011, the first purchases in more than a decade.

“We bought gold last year to diversify our reserves as it can be a hedge against inflation and investment in the U.S. dollar,” Choo said, declining to say whether the central bank plans buying more.

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