S.Korea central bank chief says unfazed by yuan deposit spike

SEOUL Thu Feb 13, 2014 1:19am EST

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SEOUL Feb 13 (Reuters) - South Korea's central bank chief said on Thursday that a recent spike in domestic deposits of Chinese yuan in South Korea was not a major cause for concern, suggesting that no serious measure was planned to limit local yuan accounts.

South Korean policymakers have been monitoring the surge in yuan holdings, which became popular as domestic investors sought the comparatively higher yields offered by the currency. Yuan deposits by local residents stood at an equivalent $7.56 billion at end-January, compared with $880 million at end-September.

"I don't think this is a cause for concern," Bank of Korea Governor Kim Choong-soo told reporters at a briefing following the central bank's monetary policy meeting on Thursday. "There has been an increase in arbitrage trade because of the deleveraging in the Chinese financial system."

The South Korean won is not directly convertible into the yuan. And unlike Hong Kong, London, Singapore and Taiwan, South Korea is not an authorised offshore trading centre for the yuan, contributing to the complexity of local yuan deposit transactions.

The yuan deposits were built through a structured product scheme in which a local brokerage sold asset-backed commercial paper to raise won from local institutions.

The proceeds were then swapped into dollars, which were in turn converted to yuan through dollar-yuan swaps in Hong Kong's offshore yuan market.

The funds were then deposited in the Korean branches of Chinese banks. The Chinese lenders, in turn, sent the money back to China to make loans there.

"Though there are risks related to credit or an increase in foreign-currency liabilities, there is an ample amount of dollars in the local system so I think (the increase in yuan deposits) is an appropriate utilisation of this," Kim told reporters.

The Financial Supervisory Service, a South Korean financial regulator, instructed Chinese bank branches in Korea late last year to slow their yuan deposit-building. Yuan deposits by local residents rose by $890 million in January from the previous month, slowing substantially from a $2.5 billion rise in December.

Regulators have so far ruled out any new measures to curb the yuan deposit buildup, though the complex series of transactions required for such deposits does pose some risks.

A finance ministry official told Reuters last week that it will discuss the matter with the central bank and financial regulators to determine whether the current instructions for Chinese banks' local branches to slow down their yuan borrowing should continue.

(Reporting by Se Young Lee; Editing by Eric Meijer)

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