Roundup: S. Korea celebrates success of won-yuan trading market as volume surges

South Korea on Tuesday celebrated the successful establishment of the won-yuan direct trading market as trading volume between the two currencies surged after the opening here a year ago.

The Korea Center for International Finance (KCIF) held a conference to celebrate the first anniversary, attended by officials of the finance ministry and the central bank as well as experts and bankers.

According to data of the Bank of Korea, the country's central bank, the daily trade volume between the Chinese and South Korean currencies here averaged an equivalent of 3.63 billion U.S. dollars in November, up from 0.88 billion dollars a year earlier.

In the past year, the daily average of the won-yuan transactions was 2.26 billion dollars, accounting for more than a quarter of the won-dollar trading.

The rapid growth in the direct exchange between the won and the yuan was attributed to lower transaction costs.

To exchange the won for the yuan, before the direct market opened, the won should have been swapped into the U.S. dollar that should be changed with the yuan later. Such brokering with the dollar had raised transaction costs.

Helped by lower transaction costs with the direct market opening, South Korean companies have increased the usage of the Chinese currency for trade settlement.

Trade settlement with the yuan among local companies rose to 930 million dollars in September from 240 million dollars a year earlier. It was an almost four-fold growth.

The KCIF expected trade settlement with the yuan to surge to 50 billion dollars by 2020, citing the yuan's international currency status, the free trade agreement (FTA) between Seoul and Beijing and the rising number of Chinese tourists visiting South Korea.

The International Monetary Fund (IMF) decided, as expected, to include the yuan in special drawing rights (SDR), the IMF's reserve asset. The inclusion of the yuan in the SDR currency basket means the yuan has gained an international currency status along with the dollar, the euro, the pound and the yen.

The implementation of the Sino-South Korea FTA will strengthen demand for the yuan further in South Korea for trade settlement. South Korea's parliament ratified the bilateral FTA on Monday, aiming for the implementation by the end of this year.

The number of Chinese travelers visiting South Korea is expected to surge to 30 million by 2020 from 6.25 million in 2014. The growing visits will increase the usage of the yuan in South Korea.

Chinese investors are increasing their holdings of South Korean stocks and bonds, raising possibility for growth in the yuan usage for financial transactions. Chinese investors owned 17.3 trillion won (15 billion U.S. dollars) of local bonds and 10.3 trillion won worth of domestic stocks as of the end of October.

Amid rising demand for direct transactions between the won and the yuan, South Korea plans to quote the direct rate of exchange between the two currencies from next year.

Now, the won-yuan exchange rate is calculated based on the won-dollar and the yuan-dollar exchange rates as is the case of other currencies like the won-yen and the won-euro exchange rates. It is called an arbitrage exchange rate.

The South Korean finance ministry said that the quote of the direct exchange rate between the won and the yuan will lower the transaction costs further.

South Korea also plans to issue the yuan-denominated sovereign bonds in China, encourage Chinese institutions to sell yuan bonds in South Korea and induce South Korean banks to expand yuan lending to Chinese companies, the ministry said, noting that it will make South Korea develop into the hub of the yuan transactions. Enditem