Hi! Do you remember that my recent article was about Korea’s sovereign credit rating being raised? Today, I am coming back with another hot issue closely related to Korea’s position in the world economy. Lately, the Minister of Ministry of Strategy and Finance announced that Korea and China held a working-level talk about a plan to implement Korea-China currency swap. As you can see from the chart below, the trade volume between Korea and China has been significantly growing each year. In this blog post, I will introduce you what was discussed during the working-level talk between two countries. You will get to know the possible ripple effects of the currency swap.
Currently, the Bank of Korea is processing a contract with the Bank of China, to sign up for a currency swap amounting to 64 trillion won. If the currency swap is implemented, funds procured by trades between two countries can be directly lent to domestic banks without any process of currency exchange. Also, the currency swap will allow importing and exporting companies to pay their bills without exchanging their currencies. These are the main points discussed at the working-level talk.
The currency swap is deemed possible, as the Korean government has made the Korean Won (KRW) internationally recognizable. Through the currency swap, corporations making transactions in KRW will be able to diminish risks in trades, even though there still remain currency fluctuations. Also, with the domestic banks’ less incentives to attract foreign reserves into Korea, there will be less burdens involved with debt crisis in foreign currencies. Lastly, if the international demand for our currency increases, profits from currency issuance are expected.
Indeed, Korean economy is one of the biggest as well as healthiest economies in the world at the moment. However, amid this prosperity, there are things that the government and financial companies should be aware of. If foreigners are allowed to hold KRW through currency swaps, there will be no rules limiting the amounts of KRW that foreigners can possess. What does that mean? Foreigners are free to use their KRW to purchase Korean securities, stocks and government bonds and whatsoever, as much as they want to. This might turn out to be a risky factor in a long run.
However, if Korea stops putting efforts to make KRW internationally recognizable currency, foreign investment and capital flows would not be injected to Korean market. Those flows are to be destined to other attractive countries, such as Hong Kong and Singapore where there are very active flows of international finance and trade. Hence, it seems right for the Korean government to keep working towards making KRW global, while a careful attention should be paid to prevent risks and to promptly deal with possible problems.