Won-Yuan Trading

 

South Korea's direct won-yuan trading market celebrates its first anniversary on the first day of next month. The daily average trading volume almost tripled from US$880 million to US$2.29 billion between December last year and the third quarter of this year, which is quite contrary to the won-yen trading market that had shut down in just four months back in 1996.

Still, the story is quite different for the forward exchange market which opened on Oct. 5. According to the Korea Exchange, the cumulative trading volume of the market stood at 2.65 billion won(US$2.29 million), equivalent to a daily volume of 70 million won(US$60 thousand) or so, between Oct. 5 and Nov. 29. This is because of a small amount of trade settlement by enterprises that led to the lack of necessity of foreign exchange risk hedging by means of derivatives. For reference, the amount of the yen and euro futures traded during the same period were worth 555.27 billion won (US$480 million) and 204.27 billion won(US$176 million), respectively. Korea has no direct trading market for the two currencies, each of which is in wide use for trade settlement purposes.

This implies that the rapid increase in the won-yuan spot transaction volume relies heavily on imaginary demands in the form of transactions between financial institutions. According to the Ministry of Strategy & Finance, the yuan-based settlement accounted for merely 3.4% of the exports to China in the third quarter of this year on customs clearance basis.

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