South Korea has lifted the 14-year-long ban, allowing domestic financial institutions to purchase 'Kimchi bonds' to increase hedging capital and improve foreign currency liquidity.
MAIN CONTENT
The Bank of Korea reopens the 'Kimchi bonds' market after 14 years of prohibition.
Due to higher USD borrowing costs, domestic companies are not in a hurry to issue many 'Kimchi bonds'.
What does the decision to lift the 'Kimchi bonds' ban by South Korea mean?
The Bank of Korea asserts that this move aims to enhance foreign exchange liquidity and adjust the balance of supply and demand for foreign currency, according to a Financial Times report on July 1, 2024.
Information from the CEO of the Bank of Korea emphasizes: 'Reopening the purchase of 'Kimchi bonds' will help stabilize the foreign currency market and reduce downward pressure on the won' (CEO Kim Yong-beom, 2024). Since 2011, the prohibition on purchasing bonds issued in Korea but denominated in foreign currency (USD) has been maintained to limit exchange rate distortion risks.
The lifting of the 'Kimchi bonds' ban after more than a decade demonstrates timely adaptation to fluctuations in the foreign exchange market and increasing demand for hedging capital.
CEO Kim Yong-beom, Bank of Korea, 2024
Why did South Korea decide to change its foreign exchange policy in 2024?
In the context of individual investors heavily investing in foreign stock markets and USD stablecoins, the won has weakened and foreign currency liquidity has become tight, leading to a fundamental policy adjustment.
A 2024 report from the Bank of Korea shows that Korea's foreign exchange reserves fell to their lowest level in 5 years in May, forcing the government to take strong measures to lift foreign exchange restrictions, expand foreign currency borrowing limits, and encourage foreign capital inflows to maintain monetary stability.
What is the response of businesses and the market to the new policy?
Although the government hopes that opening the market will strengthen the won, domestic companies remain cautious about issuing 'Kimchi bonds' due to higher USD borrowing costs compared to the won.
Financial analysts believe that the issuance of domestic foreign currency bonds will increase but not dramatically, as companies prioritize sources of low-cost and stable borrowing.
Financial costs directly influence the decision to issue 'Kimchi bonds' for companies, while the open-door policy is seen as a strategic step to maintain foreign exchange liquidity.
Financial expert Lee Jae-hyun, 2024
Comparison table of the effects between the prohibition policy and the lifting of 'Kimchi bonds'
Criteria Before 2024 (Prohibition) After 2024 (Opening) Foreign currency liquidity Limited, causing shortages Enhanced, rapidly improved Exchange rate fluctuations of the won High downward pressure Stabilized and appreciated Issuance of 'Kimchi bonds' Not allowed Allowed, but with restrictions Foreign currency borrowing costs Not applicable High, causing companies to consider
Frequently Asked Questions
What are Kimchi bonds?
Kimchi bonds are foreign currency bonds issued by domestic companies to raise capital in foreign currency, expected to be converted to won at maturity.
Why did South Korea ban the purchase of Kimchi bonds from 2011?
The ban aims to mitigate foreign exchange rate distortion risks and protect the financial system from significant fluctuations in the foreign exchange market.
How does the open-door policy for Kimchi bonds affect the won?
Helps improve foreign currency liquidity, reduce downward pressure on the won, contributing to stabilizing the exchange rate in the market.
What benefits do Korean companies gain from issuing Kimchi bonds?
There is an additional diverse fundraising channel, utilizing USD cash flow for business operations or investments.
If USD borrowing costs are high, why do companies still issue Kimchi bonds?
Due to the demand for diverse capital sources and the desire to hedge exchange rate risks, companies still choose to issue Kimchi bonds despite higher costs.
Source: https://tintucbitcoin.com/stablecoin-usd-bung-no-han-quoc-mo-cua-kimchi-bond/
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