South Korean companies are moving to set up their own Chinese yuan swap market that can boost bilateral transactions by reducing currency exchange risks, business sources said Tuesday.
Sources said the move by such big names as Samsung Electronics Co. and POSCO is all part of the growing need to rely less on the U.S. dollar as a medium of transaction. China is South Korea's No. 1 export market, far surpassing the United States.
Tech giant Samsung started a direct monthly settlement worth $1-2 billion per month on Monday, while steelmaker POSCO said it plans to carry out $24 billion in won-yuan exchange per year to handle money being used to build a mill in China.
Besides these companies, shipbuilder Hyundai Heavy Industries Co. and LG Chem Ltd. have created small-time currency exchange arrangements to meet their needs.
Fluctuating dollar exchange rates and the large volume of trade is fueling calls for a swap arrangement that can augment the already existing Reminbi Clearing Bank operations and won-yuan direct exchange market set up late last year.
Most trade settlements with China call for the South Korean won to be converted to the dollar and then exchanged for yuan.
The latest actions, moreover, can help South Korea become a new reminbi hub to rival that of Hong Kong and Singapore. At present some 1 percent of all trade between South Korea and China is carried out with yuan, but the goal is to push this up to 20 percent later on down the line.
Many market actors said the swap system is necessary because there is a need to reduce the exchange commission and exchange risk that come with using the yuan compared to the U.S. greenback.
"Because of such risks and extra cost, there is no particular merit to using the yuan instead of utilizing the dollar for trade," a businessman said. The exchange commission for the yuan is about 3 percentage points higher than the dollar.
He said to overcome this, there must be more inflow of the yuan and the creation of a viable infrastructure so the Chinese currency can be used directly to settle accounts and be used in the making of investments. Such developments could become a reality if a working and large-scale swap arrangement is created.
Related to the swap market, the finance ministry said its creation could help companies better control risks and ease settlement of accounts.
It, however, made clear that all measures are being led by businesses with the government playing no part, even though policymakers are expected to announce a master plan on transforming South Korea into a yuan financial hub in June.
"It is being created to expand usage of the yuan and not being set up artificially under the direction or control of the government," the ministry stressed.
It added that the swap market being built has little to do with efforts by the government to stabilize the foreign exchange market. (Yonhap)
