China buys more Korea bonds despite tax

China boosted its holdings of Korean bonds last month even as lawmakers in Seoul reinstated a tax on interest income from debt securities.

China’s net purchases of Korean Treasury notes totaled 444 billion won ($395 million), 23 percent more than in December 2009, the Financial Supervisory Service said Thursday. The addition more than tripled China’s holdings of Korean fixed-income securities to 6.57 trillion won at the end of last year. The financial regulator also said net outflows by overseas investors were 5.3 trillion last month, a record.

“China was a net investor every month last year,” the statement said. “We believe the record net outflows came from several factors, including the passage of foreigner bond tax, the European debt crisis, a stronger dollar and year-end position adjustments.”

Parliament passed a bill in December that revived a tax of as much as 14 percent on interest income from treasury and central-bank bonds and a 20 percent levy on capital gains from their sale. Officials from Latin America to Asia have tried to slow fund inflows and curb gains in their currencies since last year to protect exporters.

China is considering allocating more of its $2.65 trillion foreign-exchange reserves to emerging-market currencies to boost returns, central bank Governor Zhou Xiaochuan said in October. The nation should expand investment of its reserves in bonds and stocks, Zhang Monan, an economics researcher with the State Information Center, wrote in a commentary published by the China Daily newspaper on Dec. 30. 

(Bloomberg)