July 2 (Bloomberg) -- South Korea and China will hold talks on allowing direct trading between the won and the yuan when the nations’ leaders meet tomorrow to discuss ways of deepening economic ties between the two nations.
South Korean President Park Geun Hye and Chinese President Xi Jinping will discuss issues including the possibility of making yuan directly exchangeable for won, according to a statement on the Blue House website. South Korea is setting up infrastructure for the yuan-won market which may open this year, Choi Hee Nam, Director General at the Finance Ministry, said by phone on June 19.
The talks come as China seeks to promote the use of its currency in global trade and finance. The British pound in June became the fifth major currency to be exchangeable directly for yuan in Shanghai, joining the Australian and New Zealand dollars, the Japanese yen and the U.S. dollar. China is South Korea’s biggest export market, accounting for some 25 percent of shipments in the last six months, official data show.
“The biggest beneficiaries of the won-yuan direct trading will be exporters that can cut currency conversion costs and risks,” An Yu Hua, a Seoul-based fellow researcher at Korea Capital Market Institute, said by phone. “The most important point will be whether direct trading is allowed in Shanghai as well as Seoul, as South Korea has some limits in allowing offshore trading of the won.”
South Korea’s exports to China climbed 0.6 percent in the first half of 2014 and the trade surplus with Asia’s biggest economy totaled $24.08 billion, according to a July 1 report by the trade ministry. Residents’ yuan deposits jumped 70 percent to the equivalent of $11.33 billion in the first five months of 2014, Bank of Korea data show.
Xi will visit South Korea for two days starting tomorrow in his first trip to Seoul since taking power. The establishment of a won-yuan market can facilitate yuan settlement in bilateral trade and may help reduce appreciation pressure for the Korean currency against the U.S. dollar by curbing inflows, Kwon Goohoon, a Seoul-based economist for Goldman Sachs Group Inc., wrote in a March 5 report.
Given South Korea’s large trade surplus with China and the Chinese government’s policy of promoting yuan usage globally, efforts to create the won-yuan market are likely to gain momentum in the second half of this year, Kwon wrote in a June 30 note.
China’s currency ranked seventh for global payments in May, according to Society for Worldwide Interbank Financial Telecommunications. South Korean exporters settled 85 percent of their payments in dollars in the first quarter, a central bank statement showed April 23. The euro’s share was 6.1 percent, the yen’s 3.2 percent and the won accounted for 2 percent. About 0.4 percent was settled in yuan.
The won appreciated 5.2 percent against the dollar in the second quarter of 2014 and 5 percent against the yuan, the biggest gains among 31 major exchange rates tracked by Bloomberg.
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