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| Woori Bank Chief Executive Lee Soon-woo, right, shakes hands with Pen Chun, chief of the Bank of Communication after they sign a strategic partnership to promote won-yuan settlements at Woori Bank's headquarters in Seoul on June 24. / Courtesy of Woori Bank |
By Choi Kyong-ae
Local banks have begun competition to secure a leading position in the burgeoning won-yuan direct exchange market.
They started exchanging the won with the yuan directly. On July 28, Woori Bank signed a forward contract with Barclays Bank's Seoul branch, which allows Woori to buy 31 million yuan ($5 million) in one month from the British bank for 5.1 billion won, or at a fixed rate of 165.7 won per yuan, the bank said in a statement.
"The deal is the first of its kind for Korean banks. Chinese banks as well as other multinational banks are approaching us for a similar contract," said Yoon Jong-in, deputy general manager of Woori Bank's Trading Department. "They see an explosive growth potential in the won-yuan direct exchange market in Korea, a major trading partner of China."
Exports to China accounted for 26 percent of Korea's overall exports last year. Korea posted a trade surplus of $62.8 billion from trades with China. So there will be a stable inflow of the yuan, or Renminbi (RMB), into the Korean market as trades with China are on the rise, economists said.
If more Korean banks adopt the yuan as a major settlement currency along with the dollar, Korean exporters will be the main beneficiaries due to lower exchange costs either in the spot or forward markets, they said.
Companies hedge their currency exposure through forward contracts. Forward contract allows a company to buy or sell a certain currency at a given date in the future to remove its exposure to external factors such as volatile foreign exchange moves.
"Currently, most of forward contracts are dollar based. Yuan-denominated earnings initially have to be converted into the dollar and then converted into the won," said Yoon.
On July 28, Woori also agreed with two Chinese banks ― the Bank of Communication and the ICBC to exchange a total 92 million yuan into the won, said the statement.
A day earlier, Korea Exchange Bank paid 1 billion won to buy 6.2 million yuan from the Bank of China's Seoul branch in a direct transaction without going through the dollar, the bank said in a statement.
"An increase in direct exchanges between won and yuan will facilitate the planned establishment of a new RMB clearing center in Korea. It will also help travelers to China cut charges for currency exchanges," the statement said.
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| An employee of Korea Exchange Bank poses at its local branch, holding bundles of won and yuan in her hands after the bank completed a deal to directly exchange 1 billion won into 6.2 million yuan on July 25. The deal was the first of its kind for a Korean bank. Courtesy of KEB |
Yuan's emergence in Korea
Korean banks' rush to the won-yuan direct exchange services is a major outcome of Chinese President Xi Jinping's visit to Seoul early this month for a summit with his Korean counterpart Park Geun-hye.
The two leaders agreed to set up the RMB clearing center in Seoul this year. Xi designated the Bank of Communication as the clearing and settlement bank for such transactions in Seoul.
He offered the Renminbi Qualified Foreign Institutional Investor (RQFII) quota for Korea at 80 billion yuan, or 13.05 trillion won.
Under the given quota, Korean institutions are allowed to invest a combined 80 billion yuan in the mainland China. There is no given period for the investments. Previously, they didn't have an access in the area.
As of June, China allowed Hong Kong the RQFII quota of 270 billion yuan, followed by Taiwan with a quota of 100 billion yuan, the Great Britain, France and German all each with 80 billion yuan, and Singapore with 50 billion yuan.
China has stepped up its efforts since 2009 to make the RMB a major settlement currency. It has built the "yuan hub" in Hong Kong, London, Singapore and Taiwan in the decade ended in 2013. A new yuan hub in Korea will be added this year.
"China is also planning to build a yuan hub in Japan and the United Arab Emirates," Yoon at Woori Bank said.
Korea became the world's eighth biggest offshore RMB center when it comes to payments value sent and received, except for China and Hong Kong, in June this year. A year earlier, the country had the 15th ranking, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
SWIFT is a member-owned cooperative that provides the communications platform, products and services to connect more than 10,000 banks, brokerages and companies in 212 countries.
Korea has historically been underweight in the use of RMB, though China is Korea's major trade partner which receives nearly a third of goods exports. But the stance is changing, the Hongkong and Shanghai Banking Corp. (HSBC) said in a statement.
"Korea has taken a number of steps to support internationalization of the RMB, including the Bank of Korea's bilateral swap agreement, official dialogue on RMB trade and investment and RMB:KRW direct convertibility," HSBC Korea Chief Executive Martin Tricaud said in the statement.
He expected the yuan to be one of the top three global trade currencies by 2015 and it will be fully convertible within 5 years.
The yuan is the world's seventh most active currency for global payments and accounted for 1.55 percent of payments worldwide. Yuan payments rose in value by 7.1 percent in June 2014, while at a global level, all currencies increased in value by only 1.4 percent during the same period, according to SWIFT.
In June 2014, 69 percent of all direct payments between Korea and China/Hong Kong were in RMB, up from 33 percent a year earlier. A yuan clearing center in Seoul could further benefit the trading activities between the two countries, SWIFT said.
"Korea's RMB payments growth should be driven by customer payments, not the government's push," Yoon said.
