SEOUL, Dec. 1 (Korea Bizwire) – The already close economic ties between South Korea and China will receive a further boost from the yuan’s inclusion in the International Monetary Fund’s (IMF) reserve currency basket, local observers said Tuesday.
The move, to go into effect on Oct. 1, 2016, is not expected to have an immediate impact on bilateral cooperation or the international financial market as a whole, but the steady rise of China as a global economic powerhouse will be felt down the road, they said.
“Many central banks will move to increase their yuan holdings, although the pace will be gradual so its effect will not be felt immediately in South Korea,” an official at the Bank of Korea said.
Others pointed out that China is South Korea’s No. 1 export market and that Asia’s fourth-largest economy has been moving to increase use of the Chinese currency for some time.
Seoul and Beijing opened a direct Korean won-yuan market in December 2014 that reduced the inconvenience and extra cost of foreign exchange transactions between the two neighboring countries.
The two trading partners have in place a 64.7 trillion won (US$55.8 billion) currency swap agreement reached in April 2009.
In addition the finance ministry confirmed Monday that it will float yuan-denominated foreign exchange stabilization bonds in China in December to better meet rising demand for the Chinese currency and help local firms do business in the world’s No. 2 economy.
On the downside, some have cautioned that greater dependence on the yuan can raise South Korea’s exposure to sudden international financial market shocks.
“There are some uncertainties associated with closer links with the Chinese currency that need to be monitored,” said Lee Chi-hoon, a researcher at Korea Center for International Finance.
Related to the impact of the yuan’s joining the SDR basket, the local business community expected the IMF’s decision made on Monday will be good for local companies in the mid-to long-term.
Eom Chi-sung, head of the international team at the Federation of Korean Industries (FKI), said 90 percent of trade carried out by local companies with China uses the dollar.
He said with the yuan becoming a SDR currency, firms can opt to use it which should help them reduce their vulnerability to fluctuations of the U.S. greenback.
“Once demand for the yuan grows, Beijing will naturally strive to stabilize it domestic financial market,” the expert said. “Such a development can help local companies.”
Others said that by becoming part of the SDR, China’s central bank will have leeway to set rates that better reflect market development.
Such changes can breathe new life into the economy that is good news for South Korean companies. Local exporters ship around 35 percent of all goods abroad to China.
“Any change regarding which currency to use to settle their accounts cannot be taken quickly, although having greater options can make firms less reliant on a single currency, which can be a good thing,” said an official at a local business group.