ID :
195694
Tue, 07/19/2011 - 06:22
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https://oananews.org//node/195694
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S. Korea to ban bank investment in kimchi bonds
(LEAD) SEOUL, July 19 (Yonhap) -- South Korea plans to bar banks and other financial firms from investing in foreign currency bonds sold within the country for the purpose of converting the proceeds into the local currency, in a bid to curb short-term foreign debt, the central bank said Tuesday.
Since May, the Bank of Korea (BOK) and the financial watchdog have been inspecting banks' handling of so-called "kimchi bonds," foreign-currency debt sold by local and foreign companies in South Korea, as excessive sales of such bonds have been blamed for raising short-term overseas debt.
The BOK said Korean banks, local branches of foreign banks and other financial firms are required to check a kimchi bond seller's purpose if they want to buy them. If such bonds are sold with the aim to convert the dollars into won, those institutions are not allowed to invest in the debt.
The move will take effect starting July 25, but existing bond holdings will not be affected by the regulation.
"Companies can sell foreign currency-denominated bonds as they do currently, but banks and other institutions will be prohibited from investing in foreign currency bonds issued to convert dollars into the won," Kim Han-soo, head of the BOK's international planning and coordination team, told reporters.
He said over the long haul, the move would considerably affect the sales of such debts.
The use of proceeds from the sales of kimchi bonds is originally restricted to foreign-currency transactions, but some local firms have sold kimchi bonds to convert dollars into won through local branches of foreign banks, given that the issuance of foreign-currency bonds is cheaper than that of won-denominated ones.
The move came as excessive sales of kimchi bonds have been blamed as the main culprit of rising short-term foreign debt, putting upward pressure on the local currency. The Korean currency has appreciated nearly 7 percent to the U.S. dollar since January.
The sale of kimchi bonds reached US$17.05 billion as of the end of June, up $2.09 billion from the end of last year, the central bank said. The issuance of such debt rose to $17.84 billion in April before falling in May and June amid the government's move to curb banks' handling of such bonds.
Local branches of foreign banks are major investors in kimchi bonds, accounting for 76.9 percent of the total bond investments.
South Korea's short-term foreign debt stood at $146.7 billion as of the end of March, up $11.7 billion from three months earlier and marking the largest quarterly growth in over two years.
According to the central bank, the recent inspection found that local firms have converted about 70 percent of the proceeds from the sale of such bonds into the won-denominated funds.
A rise in short-term borrowing could become a source of headaches after a surge in foreign debt left local banks vulnerable to external shocks at the height of the global financial crisis.
South Korea is seeking to smooth excessive cross-border movement of foreign capital as it usually increases volatility and instability of the financial markets whenever big external shocks crop up.
The country tightened regulations on banks' foreign exchange derivatives positions and plans to impose a levy on banks' non-deposit foreign currency borrowings starting in August.
Since May, the Bank of Korea (BOK) and the financial watchdog have been inspecting banks' handling of so-called "kimchi bonds," foreign-currency debt sold by local and foreign companies in South Korea, as excessive sales of such bonds have been blamed for raising short-term overseas debt.
The BOK said Korean banks, local branches of foreign banks and other financial firms are required to check a kimchi bond seller's purpose if they want to buy them. If such bonds are sold with the aim to convert the dollars into won, those institutions are not allowed to invest in the debt.
The move will take effect starting July 25, but existing bond holdings will not be affected by the regulation.
"Companies can sell foreign currency-denominated bonds as they do currently, but banks and other institutions will be prohibited from investing in foreign currency bonds issued to convert dollars into the won," Kim Han-soo, head of the BOK's international planning and coordination team, told reporters.
He said over the long haul, the move would considerably affect the sales of such debts.
The use of proceeds from the sales of kimchi bonds is originally restricted to foreign-currency transactions, but some local firms have sold kimchi bonds to convert dollars into won through local branches of foreign banks, given that the issuance of foreign-currency bonds is cheaper than that of won-denominated ones.
The move came as excessive sales of kimchi bonds have been blamed as the main culprit of rising short-term foreign debt, putting upward pressure on the local currency. The Korean currency has appreciated nearly 7 percent to the U.S. dollar since January.
The sale of kimchi bonds reached US$17.05 billion as of the end of June, up $2.09 billion from the end of last year, the central bank said. The issuance of such debt rose to $17.84 billion in April before falling in May and June amid the government's move to curb banks' handling of such bonds.
Local branches of foreign banks are major investors in kimchi bonds, accounting for 76.9 percent of the total bond investments.
South Korea's short-term foreign debt stood at $146.7 billion as of the end of March, up $11.7 billion from three months earlier and marking the largest quarterly growth in over two years.
According to the central bank, the recent inspection found that local firms have converted about 70 percent of the proceeds from the sale of such bonds into the won-denominated funds.
A rise in short-term borrowing could become a source of headaches after a surge in foreign debt left local banks vulnerable to external shocks at the height of the global financial crisis.
South Korea is seeking to smooth excessive cross-border movement of foreign capital as it usually increases volatility and instability of the financial markets whenever big external shocks crop up.
The country tightened regulations on banks' foreign exchange derivatives positions and plans to impose a levy on banks' non-deposit foreign currency borrowings starting in August.
