What Effects Would the Inclusion of China’s RMB in IMF’s SDR Basket have on Korean Economy?

The IMF decided to include the RMB in the SDR basket on Nov. 30. Experts predict that this will have a limited impact on the Korean economy in the short term but they still point out that some measures should be prepared in order to cope with a higher level of synchronization between the Korean and Chinese economies and financial markets. For the time being, the RMB is expected to have a weighted value of approximately 10 percent after the inclusion.

In the domestic forex market, the use of the Chinese yuan is already on a rapid increase. Specifically, the monthly average trading volume tripled from US$880 million to US$2.64 billion between Dec. last year and Oct. this year in the direct won-yuan trading market in Seoul. A similar currency market is scheduled to open in Shanghai next year.

An increase in yuan settlement can reduce Korea’s dependence on the U.S. dollar. Settlement currency and reserve diversification can allow it to better deal with impacts attributable to the volatility of the U.S. dollar. In addition, the Korean government is planning to become the first yuan-denominated foreign exchange equalization bond issuer in the Chinese bond market within this year. The idea is to make the most of the international power of the RMB that is emerging as a key currency.

At present, about 15 percent of the foreign currencies procured by Korean enterprises is the currency of China, an investment destination very popular with Korean investors in the private sector. Korea and China signed a currency swap deal in April 2009 and the volume of currency swap is 360 billion yuan now. This means the soundness of Korea’s asset can be further enhanced by the inclusion of the RMB in the SDR basket. The Korea-China FTA, which is expected to become effective soon, is likely to lead to much more currency trading between the two countries, too.