| The South Korean government said Wednesday that President Park Geun-hye and visiting Chinese President Xi Jinping will agree during their summit on Thursday to open a market for direct transactions between the currencies of the two countries. If agreed, the market is expected to reduce currency exchange expenses of Korean exporters and help the Korean won`s internationalization in the medium- to long-term.
"We are currently discussing ways to further facilitate the bilateral currency swap deal and prepare to open a won-yuan direct transaction market," the South Korean government announced. "If we induce Chinese companies to use the Korean won and encourage Korean exporters to use the Chinese yuan, demands for the transactions between the two currencies will be formed naturally."
Currently, only transactions between the won and the U.S. dollar are made in the Seoul foreign exchange market. Changing the won to the yuan requires two money exchange processes with the dollar as the medium. However, won-yuan direct transactions will cut the transaction costs by half.
In addition, it would become unnecessary to go through conversion into the dollar, leaving the exchange rate between the Korean and Chinese currencies immune to fluctuations in the value of the greenback.
The problem lies in whether there is enough demand for won-yuan transactions. In 1996, a direct transaction market for the won and the Japanese yen opened. However, it was closed just three months later due to less-than-expected transaction volumes. Seoul sought to reopen the won-yen direct transaction market in 2007 but put it on hold for the same reason.
However, experts in the foreign exchange market project that the won-yuan direct transaction market is promising, as China has already become South Korea`s largest trading partner. A dealer at a local commercial bank said, "Given the size of bilateral trade, there needs to be a period for the creation of the market initially. But I think that the market will become successful with the passing of time." Won-yuan direct transactions will likely encourage banks to develop new financial products that would borrow the won at low interest rates and invest in higher-interest yuan-denominated assets.
"The most urgent thing is to create the basis for bilateral transactions so that such a market can be opened," said an official at Seoul`s foreign exchange authorities. "No concrete measures have been concluded."