According to foreign sources, the Korean government is discussing the potential establishment of free economic zones with the Chinese government to allow free capital movement between the two countries in regions where a number of Korean companies are doing overseas business, such as Qingdao and Xi’an.
It is expected that the Chinese currency owned by Korean banks will be allowed to be lent directly to Chinese companies, as well as such Korean enterprises and their global projects in these economic zones. This is equivalent to a two or three percentage point drop in lending rates in view of the interest rate difference between the two countries. Subsidiaries of Korean corporations in China can borrow the yuan of their parent companies, too. In short, the zone is similar in concept to the Qianhai Development Zone located in Shenzhen, Guangdong Province, which was designated as a free convertibility district between China and Hong Kong two years ago.
The Chinese government is still in strict control of foreign yuan exchange and lending. Once direct lending is permitted, a so-called yuan reflux system, which is a prerequisite for Korea’s becoming a yuan hub, can take root. Incentives can be provided to Korean corporations in the zones as well.
Direct lending of Chinese currency is an unprecedented yuan internationalization measure out of the great China region. At present, it is available only in the China-Singapore Suzhou Industrial Park, the Qianhai Development Zone and the Kunshan Economic Development Zone for the attraction of Taiwanese companies. Direct yuan lending was allowed after a couple of years of discussions and tests in these zones, all of which are associated with great Chinese capital and investors.
China is aiming to achieve both political purposes and economic advantages by means of the agreement with South Korea. More specifically, it is looking to test the internationalization of the yuan in the zone while trying to advance the conclusion of the Korea-China FTA by this year by making use of the free economic zone. Nowadays, the Chinese government is moving to have the free trade deal signed during the Asia-Pacific Economic Cooperation (APEC) summit scheduled for November.