South Korea battling for RMB spoils

Rob Hartley
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Backed by its robust trading relationship with China, the east Asian nation is the latest fledgling offshore renminbi hub. Market participants shed light on South Korea’s renminbi bid as internationalization of the Chinese currency gathers pace.

The increasing internationalization of the renminbi has spawned numerous fronts in the battle to capture business from this exciting new trend in global foreign exchange markets. Headlines often focus on the efforts of leading financial centres such as London and Hong Kong to pull in renminbi business, but some smaller financial hubs are also aiming to grab their own slice of the market.

South Korea’s proximity to China and the resulting close trading relationship mean the importance of the renminbi has been growing for Seoul. This is expected to lead to the emergence of Seoul as another key market in the offshore renminbi sphere.

"Korea is geographically close to China and has a relatively stable socio-economic system," says Hoin Lee, senior foreign attorney and capital markets expert at Korean law firm Kim & Chang. "Furthermore, the cooperation between Korea and China is expected to grow even faster than in the past. The renminbi is already widely used in trade, capital settlement and remittances between the two countries and this is expected to grow. The emergence of Korea as an official renminbi hub will expedite bilateral trade and investment between Korean and Chinese companies and promote the development of an offshore renminbi market in Korea."

Task forces have been set up in several government departments to oversee the development of Korea into a renminbi hub. "The government has been supportive of encouraging the development of the market into a renminbi hub," Lee says. "Perhaps with the hope of revitalizing the Korean financial industry and also reducing renminbi settlement risk and transaction costs with China."

Bank of Communications' Seoul branch was designated as a renminbi clearing bank in Korea on July 4 this year. Dongwhee Kim, a renminbi specialist in Bank of Korea's international financial advancement team, believes that a more efficient renminbi clearance and settlement service could be provided to Korean banks through this clearing bank. "Recent interconnectivity between China and Korea is very high in many areas such as trade and personal exchange," he says. "China is the number one trading partner for Korea, and Korea is the number four trading partner for China." But despite trade between Korea and China expanding and Korea running a large trade surplus with China, the portion of renminbi settlement is still very small, says Kim.

He adds: "I believe that Korea-China trade will keep growing, and renminbi settlement will increase continuously too. Also, I think that the large trade surplus could provide renminbi liquidity in the Korean renminbi financial market. So I believe that it will contribute to the development of a renminbi hub in Korea."

According to Bank of Korea, in 2013 exports to China from South Korea were equivalent to $145.9 billion, up from $134.3 billion in 2012. Imports from China totalled $83.1 billion in 2013 and $80.8 billion in 2012. As of the end of September 2014, renminbi deposits in South Korea totalled the equivalent of $20.35 billion, Bank of Korea says.

Bank of Korea and the People’s Bank of China have a bilateral local-currency swap arrangement, that could be used for liquidity support. It is worth Rmb360 billion/W64 trillion ($58.8 billion). This means that the total principal amount outstanding at any time under the swap transaction between the two banks shall not exceed that amount.

Kim Dan-Joo, head of local product management, transaction banking, at Standard Chartered Korea, believes there could be three aspects in the first phase of Korea’s development into an offshore renminbi hub.

The first is the introduction of the clearing bank and the setting up of a renminbi settlement system. The second is a won-renminbi direct trading link. The third is an increase in the RQFII quota application by domestic banks and investors. This is expected to be followed by an increase in cross-border lending via capital account and the issuance of offshore renminbi-denominated bonds, and finally the active phase of the renminbi financial market, she says.

She adds: "When the renminbi promotion plans, which are being implemented step by step, are executed well and South Korea takes root as an offshore renminbi hub, the next step should be to market its renminbi service capabilities not just to South Korea itself but to other countries which are not offshore renminbi centres."

It seems unlikely that Seoul will develop into a renminbi hub that can compete with rivals such as London and Hong Kong, given the size of their financial markets. But South Korea’s inherent trading advantages as a renminbi hub and the enthusiasm shown by the government for progress on the issue demonstrate that the country is serious about developing its capabilities. And as market participants explain, the country might also be able to cast its net wider and become a destination market for people outside wanting to take advantage of the country’s renminbi infrastructure.

The project is, however, still at an early stage and the momentum needed to make progress is still building up. Korea is making sure that when the power of the renminbi becomes more apparent, it will be ready to catch the coming wave.