(Refiles to fix headline formatting)
* Branches of three Chinese banks, one other under
* Regulators express concern about recent spike in yuan
* Unclear whether regulators will take measures after
By Joyce Lee and Christine Kim
SEOUL, March 19 South Korea's authorities are
inspecting units of four foreign banks over a spike in yuan
holdings, regulatory sources told Reuters on Wednesday,
reflecting Seoul's concern about potential risks posed by the
rapid rise in exposure to China's markets and its currency.
Yuan holdings by South Korean residents soared to an
equivalent of $7.62 billion at the end of February from $310
million six months earlier as Chinese banks aggressively raise
funds overseas in response to tighter credit back home.
Because the won can't be directly converted into
yuan, the deposits are built through a structured product using
dollar-won and dollar-yuan swaps.
Such products have been popular with institutional
investors, attracted by higher interest rates than won deposits
The total amount is still much too small to pose any
systemic threat to South Korea's $1.1 trillion economy, but
given its past episodes of financial turbulence, the authorities
are highly sensitive to rapid changes in cross-border flows.
"The inspection was initiated due to concerns that the sharp
increase in yuan deposits could lead to an increase in external
debt as well as risk of losses for depositors stemming from
increased credit risk in China," one person familiar with the
matter told Reuters, adding that it would take considerable time
for the regulators to assess the impact of yuan deposit growth.
"This inspection doesn't mean that some measure on
suppressing yuan deposits is on our minds. This is about
fact-finding," he said.
Officials have in the past expressed their concern about
potential losses for local investors if their deposits are used
to fund risky loans in China that subsequently go sour, noting
that Chinese banks were using money raised in South Korea to
lend in China.
NO OFFICIAL COMMENT
The four banks being inspected are Bank of China Ltd.
, Industrial and Commercial Bank of China Ltd.
, China Construction Bank Corp and
Barclays PLC, three regulator sources familiar with the
matter said. The sources declined to be identified because of
the sensitivity of the issue and declined to comment on why
Barclays was part of the inspection.
The Bank of Korea and the Financial Supervisory Service
(FSS) are jointly conducting the inspection, which is due to run
until March 28, the sources said. Both the central bank and the
FSS declined to comment when contacted by Reuters.
The yuan holdings account for only 14.5 percent of all
foreign currency deposits in Korea, and the total pales in
comparison with about $144 billion worth of such deposits in
Hong Kong at the end of January or the $32 billion held in
Singapore at end-2013.
Nevertheless, if deposits kept growing at current pace -- an
almost 25-fold increase over six months -- they could turn into
a major external liability.
"I think the probe stems from the fact that the yuan is
depreciating. Losses are likely if this decline becomes a trend,
so the authorities are probably looking to see what exactly is
going on," said Park Sang-Hyun, chief economist at HI Investment
& Securities in Seoul.
On Friday, Taiwan's central bank urged investors to exercise
caution in the face of risks posed by the Chinese currency's
BANKS TOLD TO SLOW DOWN
An official at Industrial and Commercial Bank of China's
South Korean subsidiary said it would cooperate with regulators,
while a Barclays media official in Hong Kong declined to
comment. Local branches of the Bank of China and China
Construction Bank could not be immediately reached for comment.
The foreign banks are authorised to raise foreign currency
deposits. The FSS instructed the Chinese banks to slow their
yuan deposit-building late last year. The regulator also wants
to limit how much of the funding can be used overseas, though it
is unclear whether such a measure will be implemented.
Worries about exposure to China's credit risks come as China
recorded its first domestic bond default this month when
Shanghai Chaori Solar Energy Science and Technology Co Ltd
missed an interest payment.
According to Chinese regulations, Chinese banks can only use
funds raised through offshore yuan markets for domestic loans in
relatively small pilot-zones such the Qianhai economic zone in
Shenzhen, which may reduce default-related risks for Korean
investors. But in practice, banks are able to find ways to
bypass these regulations.
($1 = 6.1920 Chinese Yuan)
(Additional reporting by Lee Shin-hyung in SEOUL, Xie Heng in
BEIJING, Saikat Chatterjee in HONG KONG; Writing by Se Young
Lee; Editing by Choonsik Yoo, John Mair and Tomasz Janowski)