July 31 (Bloomberg) -- A plan to start direct trading between the won and China’s yuan will hurt the South Korean currency by slowing the inflow of dollars, Goldman Sachs Group Inc. said in a report.
Governments of the two Asian countries agreed on July 3 to make their currencies mutually exchangeable in Seoul later this year. The plan supports Goldman’s prediction that the won will drop to 1,050 per dollar by the end of 2014, from 1,025.65 today, Kwon Goohoon, a Seoul-based economist at the U.S. bank, wrote in today’s report.
“This market will likely increase yuan settlement for Korean exports to China and expand yuan investments by Korean investors, weakening the won against the dollar in the process,” Kwon wrote.
South Korea’s trade surplus with China, its biggest export partner, amounted to $24 billion in the first six months of this year, according to a July 1 government report. With only 0.3 percent of trade payments settled in the Chinese currency, the won-yuan market has the potential to grow rapidly, the Goldman report said.
The value of South Korea’s yuan transactions with China and Hong Kong has jumped by 5.6 times since June 2013, the Society for Worldwide Interbank Financial Telecommunications, or Swift, said in a July 29 statement. Bank of Korea data show yuan deposits in the country surged 80 percent this year as investors sought higher interest rates.
China’s currency ranked seventh for global payments in June, according to Swift. The won has appreciated 2.3 percent against the dollar this year and advanced 4.3 versus the yuan in the same period, data compiled by Bloomberg show.
The won, which can only trade onshore in South Korea at present, may also be transacted in China in the future. The two countries will seek to establish infrastructure enabling direct trading in Shanghai, according to a July 3 statement by the Bank of Korea and the finance ministry.
The agreement also awarded South Korea an 80 billion yuan ($13 billion) quota for domestic investors to buy securities in China under the Renminbi Qualified Foreign Institutional Investor program. Bank of Communications Co. was appointed as the yuan clearing bank in Seoul.
South Korea residents held $40.67 billion in dollar-denominated deposits at the end of June, while those in yuan were equivalent to $11.97 billion, central bank figures show. Goldman’s Kwon estimates yuan savings in the country can rise 2.5 times during the next 18 months.
South Korean banks are testing won-yuan transactions. Woori Bank said it traded 1-month forward contracts directly with Barclays Plc on July 28, while Kookmin Bank said it settled a transaction with the Industrial & Commercial Bank of China Ltd. on July 23.
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