South Korea’s banks and securities firms are pinning high hopes on the recent agreement with China facilitating a direct trading deal between the won and the yuan to improve cross-border transactions and help them find new sources of revenue.
The Korean and Chinese central banks agreed last week to launch the direct won-yuan trading market in Seoul as early as this year on the sidelines of the bilateral summit between presidents Park Geun-hye and Xi Jinping last week.
Experts say the deal will help reduce transaction costs occurring from converting the local currency into the Chinese yuan ― banks are currently required to exchange the currencies through the U.S. dollar, which adds to transaction costs.
Local lenders are hoping that the reduction in transaction costs will allow more attractive foreign exchange and remittance services to expand their customer base.
“We hope and believe that in a longer term the direct deal will help facilitate financial settlements and encourage Chinese investment in Korea,” a senior banking official said.
Also on Friday, China appointed the Bank of Communications, China’s fifth-largest lender, as a clearing bank for the won-yuan trading in Seoul.
Officials here say the establishment of a yuan clearing bank is a “critical step” toward developing Seoul as an offshore trading hub for the yuan in Asia.
Some analysts, however, cautioned that the direct currency trade deal may not provide an immediate benefit for local banks.
“The cost-savings by reducing transaction costs will be nominal, unless the quantity of trade volume (between South Korea and China) increases significantly,” said Jee Man-soo, research fellow at Korea Institute of Finance.
In addition to the direct-trade deal, China also agreed to grant South Korean financial institutions quotas worth a total of up to 80 billion yuan ($12.87 billion) for investing in China’s domestic capital market.
The deal, signed under China’s Renminbi Qualified Foreign Institutional Investor scheme, will allow Korean financial institutions to invest in Chinese stocks, bonds and money-market products.
The importance of the deals, analysts said, is that South Korea’s finance industry will be able to enjoy a direct channel of investment into the world’s second-biggest economy.
The problem is, however, that China already has similar channels with a number of countries, including the U.K., Singapore and Taiwan, according to Jee of the KIF.
“For financials firms here, it’s urgent to develop financial products (based on the Chinese yuan) if they want to make something out of the latest deal,” he added.
By Oh Kyu-wook (email@example.com