Jan 19, 2012

Korea Central Bank to Buy China Yuan-denominated Assets

Heung-sik CHOO, director-general of the Bank of Korea (BOK) stated to Bloomberg that the BOK may purchase RMB-denominated (Chinese yuan) assets. 

The news may trigger most Asian economies to consider more investments in China-currency denominated assets. At present, the only other developed country that has announced plans to invest in RMB-denominated assets with foreign currency reserves is Japan.

The Director General noted that the BOK will begin by only investing in Chinese government bonds.  The investment is expected to be modest.

The China Daily has reported on this issue today and noted:
The BOK obtained a Qualified Foreign Institutional Investor (QFII) license in late December and has gained the approval of its counterpart, the People's Bank of China, to buy bonds, Choo was quoted by Bloomberg as saying.

The National Pension Service, the largest investor in South Korea, recently said that it received approval from China to invest in the Chinese securities market. Korea Investment Corp, the country's sovereign wealth fund, also said that it had received a QFII license.

Last month, Japanese Prime Minister Yoshihiko Noda announced plans during his visit to China to buy Chinese government bonds. Media reports said that the investment might be worth about $10 billion.

Japan's investment would be the first time that a developed economy used its foreign reserves to buy yuan-denominated assets.

Analysts said that Japan's move represented a significant step for the internationalization of the yuan, transforming it from a trade settlement currency to a reserve unit.

Chen Zhiwu, economics professor at Yale University, said that the purchase of Chinese government bonds by Japan and South Korea reflected China's increasing investment and trade relationships with the two countries.

However, Chen said, "the increasing foreign purchase of the yuan-denominated assets could put a burden on China's own huge foreign reserves.

"So it is unlikely for the yuan to become a true global reserve currency as long as China's trade surplus remains high."

The China Daily article may be found at: South Korea's Central Bank Weighs Purchase of Yuan Assets.
Will the RMB be a reserve currency?
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SeanHayes@ipglegal.com
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