The Bank of Korea said Tuesday it would narrow the scope of foreign exchange banks’ bond purchasing as part of its efforts to minimize side effects.

As many local and foreign banks have actively invested in foreign currency-denominated bonds, the nation has undergone steep growth in foreign currency debts and the Korean won’s appreciation.

Banks will be banned from investing in foreign currency-denominated bonds ― also known as “kimchi bonds” ― if issuers, including enterprises, issued the bonds to convert them into Korean won, according to the central bank.

“The foreign exchange banks are obliged to confirm the bond issuers’ purpose before they purchase the products,” a BOK official said.

“It will be buyers that face restriction in investing in foreign currency bonds issued to convert dollars into the won,” a BOK official said.

“But enterprises (sellers) will still be entitled to sell foreign currency-denominated bonds.”

Over the past few months, the BOK and the Financial Supervisory Service have been inspecting banks’ trading of the so-called kimchi bonds.

The move came as excessive sales of kimchi bonds have been blamed as the main culprit in rising short-term foreign debt, putting upward pressure on the local currency.

The Korean won has appreciated nearly 7 percent to the U.S. dollar since January.

BOK data show that the sale of kimchi bonds reached $17.05 billion at the end of June, up $2.09 billion from the end of last year.

The issuance of such debt rose to $17.84 billion in April before falling in May and June amid the government’s move to curb banks’ handling of such bonds.

Local branches of foreign banks are major investors in kimchi bonds, accounting for 76.9 percent of the total bond investments.

The nation’s short-term foreign debt stood at $146.7 billion at the end of March, up $11.7 billion from three months earlier and marking the largest quarterly growth in over two years.

An FSS official said banks’ short-term foreign bonds have continued to the increase since last December and shot up by more than $5 billion in March alone.

“It is estimated that the growth in foreign bonds in the first quarter surpassed $10 billion,” he said.

“Such rapid growth needs to be observed, because it can serve as a risky factor that can undermine the stability of the country’s financial market.”

By Kim Yon-se (kys@heraldcorp.com)