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S Korea braces for RMB internationalization

05-06-2011 11:39 BJT

SEOUL, May 6 (Xinhua) -- South Korea started bracing for the Chinese yuan's internationalization. The country's central bank said it applied for the status of qualified foreign institutional investors (QFII) earlier this year to invest its foreign reserves into the yuan-denominated assets.

"The central bank applied to China for QFII status to be able to invest its foreign exchange reserves in the yuan-denominated assets. The move aims to prepare for the Chinese currency's internationalization over the long haul amid China's growing influence in the global markets," a senior official at the Bank of Korea (BOK) told Xinhua Wednesday.

YUAN GOING GLOBAL

Given the Chinese currency's steady globalization, South Korea has no choice but to consider putting its foreign reserves into yuan assets, analysts at home and abroad said.

"The yuan is going through a process of internationalization. It's just a matter of how quickly it takes place. It makes sense to get in and attempt to establish investment links with China as the process evolves. There are likely to be lots of opportunities for strong investment returns, so it makes sense to establish a foothold in China before all the best opportunities disappear," Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking, told Xinhua.

China has steadily promoted the internationalization of its currency. The world's second-largest economy expanded the settlement of trading bills in renminbi, allowed western companies ' yuan-denominated bond issuance and eased various regulations on yuan uses.

Back in August 2010, the fast-food giant McDonald's issued a 200 million yuan (29 million U.S. dollars) worth of reminbi-denominated bond in Hong Kong. It became the first non-financial foreign firm which issued bonds in yuan.

By the end of last year, the number of Chinese exporters that can use yuan in trading their goods was increased from a few hundred to more than 67,000, with the total cross-border renminbi trade settlements reaching 509.3 billion yuan.

The Bank of China (BOC) allowed their customers to trade the yuan in the U.S. starting January this year, and currency swaps between the People's Bank of China (PBOC) and foreign central banks amounted to 803.5 billion yuan from December 2008 to the end of last year.

Dai Xianglong, chairman of China's National Council for Social Security Funds, said in January when speaking at annual economic forum in Beijing that yuna's internationalization should be steadily promoted, adding that the globalization of the yuan will take 15 to 20 years.

DIVERSIFICATION MOVE

South Korea's push for yuan assets came amid the country's foreign reserves surpassed the 300 billion dollar mark for the first time in April. The nation's foreign reserves reached a record 307.2 billion dollars as of the end of last month.

The reserves tumbled to 200.5 billion in November 2008 amid the global financial crisis, but it has steadily risen since then due to brisk exports and increasing conversion value of non-dollar assets.

"The central bank invested its foreign reserves mainly into the dollar-denominated assets when the size of the reserves was tiny, but now the reserves exceeded the 300 billion dollar level, so it makes sense to consider investments into profitable assets, including the yuan," the senior official at the BOK said by phone.

The official noted the BOK's diversification move is not connected with dollar weakness, but market watchers said weaker dollar trend is also believed to urge the central bank to diversify its foreign reserves.

"The diversification is the BOK's basic strategy in managing its foreign reserves owing to the manifest dollar weakness. The central bank is also considering growing influence of China in the global markets, and the yuan has potential to appreciate further against the greenback down the road," Sam Hong, senior vice president in charge of currency strategy at Shinhan Bank in Seoul, told Xinhua.

"Given the heightened status of the yuan and rising foreign reserves in South Korea, the BOK will inevitably join the Asia- wide diversification trend. At the early stage, the central bank is likely to focus on the euro assets, but its interests will widen to yuan assets which have strong economic fundamentals," Jeon Seung-ji, a currency analyst at Samsung Futures in Seoul, told Xinhua.

"Central banks around the globe have already diversified their reserves. They are not dumping the U.S. dollars, but putting new reserves into different currencies. Over time it seems only natural that the yuan will also become part of that diversification process considering it is likely prominence in trade and capital flows," Cavenagh, a currency strategist at Westpac Banking, said.

Editor:Yang Jie |Source: Xinhua

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