Seoul seeks special economic zone in China for S. Korean banks

The South Korean government is seeking ways to set up a special economic zone in Northeast China where South Korean commercial banks can lend money to local companies by using the Chinese currency reserves in the banks` vaults. The plan is aimed at channeling more than 20 billion U.S. dollars’ worth of Chinese yuan that South Korea earned from exports to China and spending by visiting Chinese tourists, using the Chinese cash reserves for business loans. If the plan is carried out, South Korea will be the first country outside of the Chinese economic bloc to enter the Chinese capital market.

According to sources in the South Korean financial industry and the government, the Ministry of Planning and Finances made the proposal for a special economic zone during Chinese Vice Premier Wang Yang’s visit to Seoul last week.

As China has yet to open up its capital market to foreign financial institutions, no foreign banks, except those in the Chinese economic bloc such as Hong Kong, Singapore and Taiwan, are allowed to offer loans in China. Therefore, South Korean commercial banks in China had to set up separate Chinese banking entities to conduct the loan business.

Seoul’s proposal calls for allowing South Korean banks to take their Chinese currency deposits made by South Korean banks and individuals to the proposed economic zone and lend money to Korean and Chinese businesses in Northeast China. The Shandong province has large loan demands as many South Korean companies are doing business there. Another candidate is the three northeastern provinces of Heilongjiang, Jilin and Liaoning, which are valuable to South Korea as an economic buffer zone for a post-reunification era due to a large ethnic Korean population and the geographic proximity to North Korea.

Seoul is seeking the measure because changes in China’s financial system resulting from the November 2014 South Korea-China summit, including the establishment of a market for direct yuan transactions, have failed to produce desired effects. While the changes allow South Korean banks to swap Korean won for the Chinese currency and South Korean companies to invest in Chinese stocks and bonds in yuan, they have not been making full use of the yuan.