It is expected that Korea and China will allow direct transactions between the won and the yuan after the bilateral summit meeting on July 3. In addition, the two parties are discussing the establishment of a yuan clearing bank in Korea for this purpose. If the plans turn out well, Korea can have a vantage point in turning itself into a yuan hub.
According to government sources, President Park Geun-hye and President Xi Jinping are going to announce economic cooperation measures, including the yuan plans, during the summit meeting.
If the direct transactions are allowed, Korean companies do not have to change money for trade with China, and they can save a lot on transaction costs such as exchange commissions. According to Standard Chartered Bank Korea, Chinese importers have saved 3 to 5 percent of their transaction costs by using the yuan as the settlement currency instead of the U.S. dollar.
The size of the trade between Korea and China amounted to US$230 billion as of the end of last year, and 99 percent of it was based on the currencies of third countries. The Bank of Korea and the Ministry of Strategy & Finance explained that Korea’s dependency on the U.S. dollar can be decreased, and the instability in the forex market due to foreign exchange fluctuations can be eased as well with direct transactions.
The establishment of a yuan clearing bank is expected to further boost the mutual investment and trade. At present, such clearing banks are located in Taiwan, Hong Kong and Singapore and are planned to be set up in Britain, France and Luxembourg.
“In Hong Kong, the size of the trade settlement based on the yuan increased eight-fold during the two years from the establishment of a yuan clearing bank in 2010,” said Korea Capital Market Institute researcher Ahn Yu-hwa, adding, “Korea’s infrastructure as a financial hub will be on par with that of Hong Kong once it houses the clearing bank and allows direct transactions.” The balance of the yuan-denominated bonds issued in Hong Kong surged by 60 percent to 237.2 billion yuan (US$38.15 billion) between 2011 and 2012. The funds also acted as a kind of leverage for Hong Kong’s investment in mainland China.
If a yuan clearing bank is set up in Korea, the role can be assumed by the Bank of Communications of China, the Industrial & Commercial Bank of China, the Bank of China, or the like. The Bank of China is assuming the role in Taiwan and Hong Kong, the Industrial & Commercial Bank of China in Singapore, and the People’s Bank of China in France and Luxemburg.
The size of yuan-based trade across the world reached 4.6 trillion won (US$740 billion) as of last year.