SEOUL Feb 13 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
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
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
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
(Reporting by Se Young Lee; Editing by Eric Meijer)