Seoul eyes opportunity in yuan's SDR status

South Korea’s Finance Ministry expressed optimism Tuesday for an increase in the nation’s exports to China after the International Monetary Fund announced it would add the Chinese yuan to its special drawing rights currency basket.

“As a preemptive measure for potential globalization of the Chinese yuan, the Korean government has built up strong bilateral cooperation with China in monetary and financial policies, in addition to continued efforts to increase usage of the Chinese currency in the domestic market,” the Finance Ministry said in a press statement. 

The ministry noted that it would continue to carry out the terms of its bilateral agreement, including the issuance of yuan-denominated foreign exchange stabilization bonds, to lay a stronger foundation for Korean financial institutions’ inroads into the Chinese bond market.

It also plans to increase the quota of renminbi-qualified foreign institutional investors and encourage direct won-yuan exchange transactions.

“Stimulation of direct won-yuan exchange deals can lead to more favorable direct exchange rates, ultimately lessening the transaction costs for Korean companies,” said Choi Ji-young, IMF team head of the Finance Ministry’s International Financial Bureau. Choi agreed that the move could be seen as an opportunity for investment expansion.

But some critics cautioned that the nation’s possible heavy reliance on the yuan could increase Korea’s exposure to sudden international financial market shocks.

Earlier in the day, IMF managing director Christine Lagarde announced the inclusion of the Chinese yuan in the agency’s SDR currency basket. The IMF board concluded that the yuan met all existing criteria, largely those related to export and global usage.

“Effective Oct. 1, 2016, the yuan is determined to be a freely usable currency and will be included in the SDR basket as the fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British Pound,” the IMF said in a press release.

By Chung Joo-won (joowonc@heraldcorp.com)