South Korea Agrees Won-Yuan Trading Link, RQFII Quota With China

South Korea and China will introduce direct trading between the won and the yuan in Seoul and promote greater use of the Chinese currency under agreements reached today during talks between the two nations’ leaders.

South Korea also won an 80 billion yuan ($12.9 billion) quota for domestic investors to buy securities in China under the Renminbi Qualified Foreign Institutional Investor program, according to a statement issued by the Bank of Korea and the finance ministry. Sales of yuan-denominated debt in Seoul will be encouraged and a memorandum of understanding was also signed to appoint a yuan clearing bank in the city.

The agreements, reached during a visit to Seoul by Chinese President Xi Jinping, will help South Korea become an offshore yuan center and bring “visible” economic benefits, according to the statement. China has been South Korea’s biggest trading partner since 2004 and accounted for some 25 percent of the latter’s exports in the last six months.

“Today’s announcements will have a synergy effect in boosting financial transactions between the two nations and lessen South Korea’s dependence on the U.S. currency,” An Yu Hua, a Seoul-based fellow researcher at Korea Capital Market Institute, said by phone. “The won-yuan direct trading will cut currency risks and RQFII will encourage South Korean investors to trade the yuan.”

South Korea and China will seek to establish infrastructure enabling the won to be directly exchangeable for yuan in Shanghai, according to today’s statement. The won can only trade onshore at present. The RQFII quota awarded today was the same as China gave to London and Paris, and compares with 50 billion yuan for Singapore and 270 billion yuan for Hong Kong.

Yuan Push

Xi’s talks with South Korean President Park Geun Hye come at a time when China is promoting the use of its currency as an alternative to the dollar in global trade and finance.

The British pound became the fifth major currency to be exchangeable directly for yuan in Shanghai last month, joining the Australian and New Zealand dollars, the Japanese yen and the U.S. dollar. China plans to accelerate free trade talks with South Korea and deepen cooperation in finance and macroeconomic policies, Xi said in a contribution to South Korea’s Chosun Ilbo newspaper today as his two-day visit commenced.

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.

China Trade

Given South Korea’s large trade surplus with China and the Chinese 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.

South Korean exports to Asia’s biggest economy climbed 0.6 percent in the first half of 2014 and the trade surplus totaled $24.08 billion, a July 1 report by the trade ministry showed.

China’s central bank will appoint a Chinese bank in Seoul as the yuan clearing house. Bank of China Ltd. is the clearing lender for the yuan in Hong Kong, Macau and Taipei, while the mandate in Singapore went to Industrial & Commercial Bank of China Ltd. Bank of China’s Frankfurt branch became the first institution in the euro area able to clear payments in yuan last month.

South Korean 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. The nation’s exporters settled 85 percent of their payments in dollars in the first quarter, according to an April 23 central bank statement. The euro’s share was 6.1 percent, the yen’s 3.2 percent and the won accounted for 2 percent. Around 0.4 percent was settled in yuan.

China’s currency ranked seventh for global payments in May, according to the Society for Worldwide Interbank Financial Telecommunications. 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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