Currency Preference
The balance of dollar-denominated deposits is at a record low due to a rising preference for the yuan.
According to the Bank of Korea, the dollar-denominated deposits in resident accounts totaled US$40.27 billion, 64.5 percent of all foreign currency deposits, as of the end of July. The percentage was as high as 83.1 percent a year ago, 74.1 percent late last year, 73.7 percent in March this year, and 69.0 percent in June.
Meanwhile, the ratio of yuan-denominated deposits has skyrocketed from 0.8 percent to 25.9 percent between July 2013 and July 2014. The amount increased 56-fold from US$290 million to US$16.19 billion during the same period. US$4.22 billion was added to the total in July 2014 alone to reach new highs in amount and ratio alike.
The rapid surge can be attributed to some Chinese banks’ upward adjustment of the deposit interest rate to 3.8 percent. Korean banks provide an annual interest rate of 2.68 percent for won-denominated deposits with a maturity of one year.
With the interest rate gap widening, both institutional investors and residents in Korea increased their deposits in Chinese banks to a large extent. As of the end of last month, the total foreign currency deposit increased by US$3.5 billion month on month to US$62.45 billion.