By Cynthia Kim and Yena Park
SEOUL, March 25 (Reuters) – As South Korea seeks to boost the global profile of its financial markets, the export powerhouse is struggling to loosen the tight currency restrictions that have for years been a major pain point for investors and traders in the country.
Asia’s fourth largest economy is one of the most advanced in the world by many metrics but has been unable to shake its classification as an emerging market due to a host of things, including the way its currency is managed.
While currency regulators are now considering modest steps to make the gain more global, such as extending trading hours, memories of bruising currency crises cast a long shadow over reforms.
For many firms and market participants, South Korea’s arcane restrictions on cross-border transactions, daily reporting requirements and broker rules slow down and cost the business.
“Having FX markets open almost all day around the clock will definitely help us plan currency conversions better and get a better deal,” said Bongju Kang, chief financial manager at a small exporter of plastic materials. “Currently we negotiate the exchange rate with a local banker the moment we see a good quote, or sometimes hours before, especially when the size of the deal is large.”
The FX restrictions are among factors often blamed for the so-called Korean Discount, the term given to the global underperformance of local stocks. Other issues include poor decision-making and weak management of major conglomerates.
Regulators say thorough FX market surveillance is still needed to prevent destabilizing currency swings.
“We have to monitor the market in times of volatility because liquidity is not always that ample in the onshore market,” said a Bank of Korea official.
Shin Joong-beom, head of the finance ministry’s International Finance Bureau, said regulators will maintain the current monitoring system and are “ready to quickly catch and respond to any disturbing market behavior”.
Until last year, the earnings could only be directly exchanged with the dollar or the Chinese yuan between a total of 56 financial institutions based in the country for only six and a half hours a day, through authorized brokers in Seoul.
That has meant higher costs for companies, as they have to rely on derivative contracts known as non-deliverable forwards to manage exposure to the earnings outside the 0900 to 1530 onshore trading window.
From July, South Korea will extend trading until 0200 to cover London hours and the country expects wider foreign participation with approx. 20 foreign banks applying to join the interbank market, according to the finance ministry.
Those changes come amid President Yoon Suk-yeol’s broader reforms to scrap the Korea Discount and boost investment, moving the country into top indices such as the FTSE World Government Bond Index (WGBI) and MSCI’s developed market benchmarks. WGBI inclusion could attract inflows of as much as $70 billion, according to some estimates.
However, growing political appetite for reform has yet to translate into change that will significantly boost earned business, analysts and market participants say.
“With international banks allowed only partial access to Korea’s interbank market and no plans for an overseas market on the horizon, we do not expect the accessibility of Korea’s financial market to change materially from the wider trading hours,” said Simon Harvey, head of FX analysis at Monex Europe.
BIGGER THAN THE POUND?
The $66 billion in daily trade makes up about 1% of global forex volume, below 3% for the Canadian dollar and 6% for the British pound, according to 2022 Bank of International Settlements data.
That keeps South Korea in the emerging market club, as earned trade volumes relative to GDP remained around 8%, similar to the Polish zloty and Chilean peso.
“There is no reason why the British pound cannot outperform if the forex rules are relaxed enough to give the market a chance to catch up with the global exporters we have today,” said Kim Hee-jin, head of trading at Shinhan. Bank.
Unlike the Hong Kong dollar or pound, foreign banks must trade the won through the two Korean brokerages for spot trading and pay a commission to a local bank to fulfill reporting obligations to authorities.
Foreign banks are also not allowed to directly trade the earnings with each other abroad.
The heavy focus on market surveillance partly reflects a hyper-vigilant mindset forged after financial traumas such as the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.
Currently, the BOK can watch every dollar transaction through brokers, a system set up decades ago to avoid a repeat of the capital flight seen in 1997, when earnings lost half their value.
“Rules imposed on the won business are really completely unheard of anywhere,” said a trader with decades of experience at global banks, who declined to be named.
“Korea is opening up the market, but that doesn’t mean everyone can join and trade the winnings.”
Forex OTC turnover by currency
(Additional reporting by Jihoon Lee in Seoul and Rae Wee in Singapore. Editing by Sam Holmes.)
((Cynthia.Kim@thomsonreuters.com; 822 3704 5655; Reuters Messaging: cynthia.kim.thomsonreuters.com@reuters.net))
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