Wed, Jul 20, 2011 - Page 10 News List

South Korea plans to clamp down on ‘kimchi bond’ sales

AFP, SEOUL

South Korea said yesterday it would ban banks and other financial firms from buying foreign-currency bonds sold by local firms for domestic projects, in an attempt to curb foreign debt and the won’s rise.

The Bank of Korea, the central bank, said financial firms from next Monday would be barred from subscribing to public offerings of so-called “kimchi bonds” if the issuer intends to swap the proceeds into won.

Local companies sometimes issue kimchi bonds to raise US dollars for settlements with US trading partners.

However, the central bank said many firms were in fact issuing such bonds to get around rules on banks’ foreign loans.

“Companies have been using about 70 percent of the bonds for won use in [South] Korea,” it said in a statement.

By law, banks can only issue foreign-currency loans if the borrower needs the money for overseas use.

Financial firms will still be allowed to buy such bonds if they are intended for overseas -foreign-currency use.

The announcement marked the latest attempt by authorities to ease the destabilizing effect of so-called “hot money.”

The country has seen a surge of foreign capital into its markets, amid solid economic growth and expectations of a stronger won. This has raised fears that the foreign cash could exit just as swiftly, as it did during the 1997-1998 East Asian financial crisis and the 2008 global crisis.

South Korea’s short-term foreign debt stood at US$146.7 billion as of the end of March, up US$11.7 billion from three months earlier, marking the largest quarterly growth in more than two years.

The government has already capped banks’ foreign-exchange forward positions to try to curb speculative bets on the won, which has risen 6 percent this year against the US dollar.

It has also brought in a tax on foreign investment in local bonds and a levy on banks’ offshore borrowings.

Authorities are concerned that kimchi bonds have been used as a way of getting cheaper loans, creating unnecessary exchange-rate risks, instead of meeting actual foreign-currency needs such as settling contracts.

As of the end of last month, outstanding kimchi bonds stood at about US$17.05 billion. About 77 percent of the total was held by the local branches of foreign banks operating in South Korea, according to central bank data.

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