SEOUL, South Korea – China and South Korea on Thursday agreed measures that will expand the use of China’s tightly controlled currency and boost trade as Xi Jinping made his first presidential visit to the Korean Peninsula.
Expectations were high that Xi’s summit with South Korea’s president Park Geun-hye would expand an economic and business relationship that has flourished in the past decade. Xi was accompanied by 250 business executives including luminaries such as Jack Ma, founder of the Alibaba e-commerce empire, and Robin Li, chairman of search engine Baidu. The Korea Chamber of Commerce said it was the biggest ever foreign business delegation to South Korea.
A statement from South Korea’s finance ministry and central bank said the South Korean won will become directly exchangeable with the yuan, joining major currencies such as the U.S. dollar, Japanese yen and euro that are convertible with the Chinese currency. The decision also makes the yuan only the second currency after the U.S. dollar that is directly convertible with the won.
At a press conference, Park said South Korea and China will aim to complete long-running free trade talks by the end of this year.
“Through these measures, exchange between companies and citizens in the two countries will become faster and more free,” she said.
China also gave South Korea a green light to invest tens of billions of yuan (billions of dollars) in Chinese bonds and stocks.
The currency agreement is another step forward in China’s ambitions for the yuan to rival the U.S. dollar as the favoured currency for trade and financial transactions. Chinese leaders say they plan eventually to let the yuan float freely, but analysts say that might be decades away. Beijing is reluctant to allow big changes in the currency for fear of hurting exporters that employ millions of workers.
South Korea’s two-way trade with China was $229 billion last year, exceeding the combined value of South Korea’s trade with the U.S. and Japan. Xi told reporters after the summit that the two countries will strive to boost their trade to top $300 billion.
China is also a crucial market and a production base for South Korean exporters such as Samsung, Hyundai and LG who are key foreign investors for China.
But nearly all South Korean exporters and importers use the U.S. dollar to do business with their Chinese counterparties because the won and yuan aren’t directly traded, incurring additional costs. More than 90 per cent of exports and imports with China were transacted in the U.S. dollar in 2013, according to the Bank of Korea.
South Korean policymakers have said they would like to make Asia’s fourth-largest economy to become a major centre for trading the yuan, vowing to complete infrastructure for such a market by the end of this year.
Officials said in the statement that the currency agreement gives Seoul an edge over Hong Kong and Singapore, two other Asian financial centres with yuan ambitions.
South Korea and China also announced new measures to boost South Koreans’ use of the yuan for investment and saving. South Korea previously relied on a bank in Hong Kong to settle yuan payments. But a Chinese bank in Seoul will now take on that role. That will help increase yuan savings in South Korea and reduce transaction fees, officials said.
China agreed that South Korean institutional investors approved by local authorities will be able to invest up to 80 billion yuan ($13 billion) in Chinese stocks, about the same limit as Britain and France though smaller than Hong Kong and Taiwan.
The ongoing free trade talks between the two countries also got a boost from Xi’s visit. China and South Korea have held about a dozen rounds of negotiations over removing tariffs on goods and services but they still have not narrowed their stance on some issues, such as opening South Korea’s agricultural industries.
All these moves will push South Korea closer to China, while Seoul has made little headway in its relationship with Japan.
In 1996, South Korea briefly opened a market where traders could directly exchange the won and the yen but that shut down in a few months. Trade talks between South Korea and Japan halted in 2004 and are yet to be resumed. The mood between the two countries recently turned sour due to recent Japanese actions seen in Seoul as attempts to whitewash past wartime atrocities, including the sexual enslavement of Korean women for the Japanese military.
The focus of South Korean tourism has also shifted to Chinese visitors as the yen’s depreciation in the past two years dented Japanese appetite for foreign travel.
For Samsung Electronics Co., China last year overtook South Korea as a bigger revenue generator, accounting for about one fifth of its revenue, nearly twice as much as revenue from its home market. Samsung’s sales from China surged from 23.1 trillion won ($23 billion) in 2011 to 40.1 trillion won in 2013. Sales in South Korea shrank from 26.5 trillion won to 22.8 trillion won over the same period.
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