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Korea, China agree to open direct Yuan-Won currency market.

At the Korea-China Leaders' Summit held on July 3, Korea and China agreed to boost financial and monetary policy cooperation, with both sides recognizing that opening currency markets would be mutually beneficial. The two leaders agreed on the following:

--A direct won-yuan currency market will be opened in Korea, and the foundations will be laid for Korea to establish a direct foreign currency market in China.

--Infrastructure will be set up to allow for yuan clearing houses to operate in Korea, and a Chinese bank located in Seoul will be designated as a yuan clearing house.

--Korea was granted an 80 billion yuan (over 13 trillion won) quota for domestic investors to purchase Chinese securities through the Remninbi Qualified Foreign Institutional Investor (RQFII) program. Taking into account market demand and how well the RQFII is utilized, the government will seek to increase this limit.

--Both publicly and privately-owned financial institutions will be able to invest in China through Chinese mainland stock exchanges by participating in the Qualified Foreign Institutional Investor (QFII) program, and any increases in investment in China that are seen will be welcomed.

--Korean corporations and financial institutions, as well as corporations and financial institutions from other countries, will be encouraged to issue yuan-denominated bonds in Korea.

The Korean government believes that these agreements will be seen as a groundbreaking advancement in financial and monetary policy cooperation between Korea and China.

Expected outcomes

1) Transaction costs will fall and bilateral trade will increase

The direct won-yuan currency market will save money on currency exchange fees as it will no longer be necessary to use the dollar as a medium in won-yuan transactions.

Korean and Chinese corporations that engage in Korea-China export-import transactions are expected to see an increase in trade owing to the large reduction in exchange rate risk.

2) Opportunity for the financial industry to take its next step forward

The Korean financial industry will be able to further develop as the agreements will open up new business opportunities, and this should also create more jobs for financial professionals.

3) Boost Korea's external soundness

Lowering Korea's reliance on the dollar by promoting currency settlement diversification is expected to improve and further stabilize Korea's economic fundamentals, which can be sensitive to dollar inflows and outflows.

4) Increase trade with China

As yuan-denominated transactions increase, trade with China will also increase, and this is expected to have a collateral effect of also increasing cultural and human resources exchange.

Future plans

A task force will be formed (composed of members from the Ministry of Strategy and Finance, the Bank of Korea, the Financial Services Commission, the Financial Supervisory Service, private financial institutions, and research institutes) to stimulate yuan-denominated financial services in order to ensure that the agreements are successfully implemented and beneficial to Korea in the long term.

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Title Annotation:Policy Issues
Publication:Economic Bulletin (Korea)
Geographic Code:9SOUT
Date:Jul 1, 2014
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