South Korea says new FX steps will boost won’s status, business for firms

By Choonsik Yoo and Yena Park

SEOUL (Reuters) -South Korea’s plans to loosen restrictions in its currency market will raise the won’s status globally and boost business opportunities for local financial firms, a vice finance minister told Reuters on Thursday.

The new measures, unveiled earlier this week, call for more than doubling the trading hours for the won until past midnight local time and allowing qualified global financial firms to directly trade the currency through two onshore spot brokerage houses.

Vice Minister Bang Ki-sun said the government was working on follow-up measures with the aim of implementing the plans in July next year, while dismissing concerns the moves could make the won more volatile.

“We are not fully allowing the won to be freely traded outside the country but just make it more convertible,” Bang told Reuters in an interview, adding the government would still maintain its oversight over the financial institutions trading the won.

South Korea has grown to one of the world’s top 10 economies in just a few decades but has kept a tight grip on its currency market, mainly out of the trauma from its near sovereign default in the late 1990s during the Asia financial crisis.

South Korea’s economy contracted in the December quarter but Bang said the most recent information indicated it would return to growth in the January-March period, without providing specific data.

He said there was no meaningful factor seen behind massive foreign fund outflows in the past two consecutive months from local bond market, other than the fact there was a large amount of bonds coming to maturity during the period.

Risks from real estate market slump

Bang also said there was almost no danger of South Korea’s cooling real estate market causing a systemic risk to the larger financial system, noting policy measures have succeeded in diffusing money market strains related to property projects.

House prices in South Korea fell 1.98% in December from a month earlier, the fastest drop since data releases began in late 2003 and a seventh consecutive month of decline.

“While there could still be companies falling into trouble individually, we can deal with them with targeted measures, but in general, I don’t see the real estate market-related problems will cause a broader systemic risk,” Bang said.

The three-month commercial paper yield had soared by more than 200 basis points (bps) in a few weeks from just above 3% in late September last year on concerns about possible debt defaults by property developers.

The government, along with the financial regulator and central bank, has since stepped in with a series of aid programmes and the yield has fallen retreated by more than 100 bps in several weeks.

Regarding the won’s rapid gain of more than 15% over the past three months, Bang played down its impact on exports, saying the country’s exporters now compete with their brand power and quality rather than prices.

“Korea’s export structure has been changing toward relying more on quality competitiveness, and so, we should make more efforts to that direction,” Bang said, while explaining the reduced impact of the foreign exchange rate on exports.

(Reporting by Choonsik Yoo and Yena Park; Additional reporting by Jihoon Lee; Editing by Lincoln Feast and Kim Coghill)